ETF Watch: 3 Firms Debut Funds

June 28, 2017

A Different Take On A Popular Space

The U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) offers a new twist on what essentially amounts to the gold miners space but can include producers of platinum, palladium and silver as well. U.S. Global Investors is also known for the US Global Jets ETF (JETS), which has $102 million in assets under management and covers the airline industry.

GOAU has an expense ratio of 0.60% and lists on the NYSE Arca.

According to a fact sheet from U.S. Global, the fund specifically targets royalty or streaming companies operating in the precious metals space. Such companies provide capital that funds the exploration and production projects of precious metals producers, and in return receive either royalties or a “stream” of the precious metals at a below-market price. The main advantage of this is that the royalty and streaming companies do not have much in the way of operating costs, as it is the producers who must maintain the infrastructure of a mining operation.   

“They have unique fundamental factors that truly differentiate them from the gold stocks,” said Frank Holmes, CEO and chief investment officer of U.S. Global Investors. He points out the royalty firms’ outsized revenue per employee ratios compared to traditional gold mining companies; a U.S. Global Investors document indicates that Wheaton, one of GOAU’s top holdings, generates $25.8 million per employee compared with less than $400,000 per employee for traditional gold mining companies like Barrick and Newmont.

The same document also cites data indicating that royalty companies offer more revenue-per-share growth, higher rates of dividend growth and lower debt levels than traditional precious metals companies.

A 4-Tiered Approach

Eligible companies must derive at least half of their aggregate revenue from mining and production activities or the funding of such activities. Companies’ stocks or ADRs must be listed on an exchange in one of six countries: Australia, Canada, Hong Kong, South Africa, the United Kingdom or the United States. They must also meet requirements regarding minimum liquidity and permissible levels of debt, according to the prospectus.

Priority is given to companies with the highest revenue-per-employee levels, with those firms scored based on revenues and operating cash flow per employee and on gross margin. Companies not classified as priority are scored based on their operating-cash-flow-to-enterprise-value ratio, the prospectus said.

There are generally 28 component companies in the index that are sorted into tiers based on their scores and other criteria. Tier 1 consists of the three top-scoring companies listed in the U.S. or Canada that derive more than 50% of their revenue from silver or gold and have a market capitalization of at least $1 billion. Each of the three companies is weighted at 10% of the total index.

Tier 2 consists of five companies weighted at 4% each. They are chosen based on their fundamental factor scores and can be listed in the U.S., Canada, Australia, South Africa or the United Kingdom. Each must have a market capitalization of at least $400 million.

Tier 3 covers 10 securities weighted at 3% each. They are chosen, based on their scores, from the same countries mentioned for Tier 2, but the minimum market-cap requirement is $300 million. Finally, Tier 4 includes 10 companies listed outside of the U.S. and Canada that are selected based on their scores and weighted at 2% each, with a minimum market-cap requirement of $200 million, the prospectus said.

 

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