The Pros And Cons Of Gold Miner ETFs

August 13, 2012

Look before you leap when it comes to gold miner ETFs.


If the Fed decides to execute more quantitative easing, gold prices are likely to soar. So, what should investors do?

As things stand, many investors use equities to play gold and avoid higher taxes associated with funds structured as grantor trusts. In total, gold miners ETFs have $10.5 billion in assets. But are investors getting the exposure they expect?

The answer is no, and that's largely because the fund names don't reflect what they truly hold.

So, let's start with the six gold ETFs now available:

  • Market Vectors Gold Miners (NYSEArca: GDX)
  • Market Vectors Junior Gold Miners (NYSEArca: GDXJ)
  • Global X PURE Gold Miners (NYSEArca: GGGG)
  • Global X Gold Explorers (NYSEArca: GLDX)
  • PowerShares Global Gold and Precious Metals (NasdaqGM: PSAU)
  • iShares MSCI Global Gold Miners (NYSEArca: RING)


It turns out that gold equity funds often invest in silver and other precious metals. This is partially due to the fact that most of the gold miners ETFs currently available don’t have to replicate their index fully. In fact, only 80 percent has to be invested in the underlying benchmark, whereas most equity funds have a 90 percent requirement.

Therefore, nongold miners infiltrate ETF portfolios, and up to 20 percent of holdings can be unrelated to the gold mining business. For example, Market Vectors’ GDX holds Silver Wheaton, the world’s largest silver-streaming company, as its fifth-largest holding, at 5.21 percent of total assets.

GDX also has a number of smaller silver holdings, such as Pan American Silver, First Majestic Silver, Hecla Mining, Silver Standard and Coeur D’Alene Mines. In addition, firms that are focused primarily on gold mining can also be engaged in the mining of other metals, which can further dilute exposure to gold. Kaminak Gold Corp., for example, deals in nickel and uranium as well.

Although gold and silver are often grouped together, silver is a poor substitute for gold. Gold is primarily used as an investment or in jewelry, whereas silver has numerous industrial applications. According to the World Gold Council and The Silver Institute, over 50 percent of silver is used in industry compared to about 10 percent of gold.

So, the price of silver is more heavily dependent on the demand for the products it’s used in. In other words, silver is more cyclical than gold. The correlation between gold and silver spot prices over the past two years is 0.77, no doubt less than many might think.


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