Gold ETFs have become exceptionally popular as these instruments mitigate many of the most pressing drawbacks to gold ownership - wide bid/ask spreads, physical storage needs, and convenient buying and selling options. Investors have more than a couple of choices within the gold ETF space, including choosing between bullion-oriented funds, futures-oriented funds, and funds which hold gold miners stocks. As the largest gold miner-oriented fund, Market Vectors Gold Miners ETF (GDX) is an interesting option worthy of further exploration .
In A Nutshell
GDX gives investors exposure to gold prices through ownership stakes in gold mining companies. The Gold Miners ETF was launched in May of 2006 and has since accumulated nearly $10 billion in assets under management .
This ETF replicates the NYSE Arca Gold Miners Index - a modified market cap-weighted index that includes companies worldwide whose primary operations are gold mining.
What Makes GDX Unique
GDX stands out for having a mix of large, medium, and small-cap miners, as well as companies from a host of countries. As it is the only ETF to use the NYSE Arca Gold Miners Index, its weightings will be unique, though many of the prime holdings like Barrick Gold (ABX), Goldcorp (GG) and Newmont (NEM) appear in other precious metal and mining funds .
GDX is far and away the largest and most liquid mining-oriented ETF on the market. In fact, GDX is one of the relatively few funds that can challenge the well-known SPDR Gold Shares (GLD) ETF in terms of liquidity. With this popularity, GDX is also unique amongst ETFs in having an active and liquid options market, allowing investors to implement more sophisticated trading strategies.
How It Fits
GDX's place in a portfolio depends at least in part upon an investor's views towards the role of precious metals in a portfolio. Some investors believe that the lower correlation and inflation protection offered by precious metals make them a mandatory inclusion in almost all portfolios, while others believe they are suitable only for more speculative trading strategies .
The rise of bullion and futures-based gold ETFs has decreased the correlation between the movements of gold bullion and gold mining equities. Nevertheless, gold miners do tend to offer more upside (and downside) when gold moves up (or down), though they can founder in periods where gold is rangebound and production costs are on the increase.
While GDX can serve as a compliment to help fill much of the diversification role of bullion or bullion-like holdings, this fund can also be useful as a tactical tool for playing anticipated trends in gold mining like improved (or worsening) cost efficiency.
What It'll Cost You
GDX charges investors an expense ratio of 0.53%, which is slightly below the Commodity Producers Equities ETFdb Category average; similar funds carry expense ratios ranging from 0.35% to 0.85%. This fund also offers a small dividend, so investors should be aware of the tax consequences there. Furthermore, GDX is not presently available forcommissionfree trading .
Under The Hood
The portfolio of GDX is only moderately diversified, as the fund holds about 30 securities. Roughly two-thirds of the fund's total assets are concentrated in the top 10 holdings, giving this ETF a top heavy profile. The top holdings are the aforementioned Barrick, Goldcorp and Newmont, although investors should also realize that several of the top holdings have substantial operations in silver mining .
The fund's market cap-based index also results in a heavy skew towards larger companies. Large-cap companies (which the fund sponsor defines as $5B or more in market capitalization) make up more than four-fifths of the portfolio, while small companies (below $1 billion) make up an almost insignificant weighting.
Yield, Volatility and Performance
GDX pays out a dividend distribution once a year.
When it comes to risk and volatility, GDX has a beta that is substantially above the market, but this is not uncommon or unexpected for a commodity producers fund; as such, its expected volatility should fall above broad U.S. stock benchmarks over the long-term.
For the five full years of the funds existence, GDX's annual returns have been 16.8% (2007), -26.1% (2008), 36.7% (2009), 33.9% (2012) and -16.1% (2011). Those returns do differ significantly from that of gold bullion as reflected in the returns of GLD, which have been the following over those same years: 30.6% (2007), 5% (2008), 24% (2009), 29% (2010) and 9.6% (2011).
GDX does stand out for its size and liquidity among mining funds. Nevertheless, there are other options that investors should consider:
- PowerShares Global Gold and Precious Metals Portfolio (PSAU): This ETF holds more than twice as many securities as GDX, but it's still heavily weighted towards its top-ten holdings and it features a higher expense ratio.
- Van Eck Market Vectors Junior Gold Miners ETF (GDXJ): This ETF is philosophically similar to GDX (they're run by the same sponsor), however, it focuses on small and mid-cap mining firms instead. GDXJ holds a relatively large number of positions (more than 80), although it is more volatile and expensive than the large cap-focused GDX.
- Global X Pure Gold Miners ETF (GGGG): This ETF avoids exposure to mining companies with substantial exposure to metals other than gold, resulting in more of a pure play. Compared to GDX however, this fund is more expensive and far less liquid.
Disclosure: No positions at time of writing.
Mutual Funds & ETFsFind out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
Mutual Funds & ETFsLearn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
Mutual Funds & ETFsLearn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
Mutual Funds & ETFsLearn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
MarketsRead about the top five Chinese natural gas companies as measured by gas production volume and learn a little more about their business operations.
Mutual Funds & ETFsDiscover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
MarketsRead about the top Chinese insurance companies by market capitalization, and learn a little about their positions in the marketplace.
InsuranceRead about the top personal auto insurers operating in New Jersey, and learn about recent trends in market share among these companies.
Mutual Funds & ETFsLearn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
Mutual Funds & ETFsLearn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
The value of an asset less the value of all liabilities on that ...
A security that tracks an index, a commodity or a basket of assets ...
Investopedia explains the definition of exchange-traded mutual ...
An alternative investment theory to Efficient Market Hypothesis ...
An asset that is extremely difficult to dispose of either due ...
When an investor has essentially risked all of his capital for ...
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>