Depreciating Gold Miner ETFs Rake In AUM

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The Market Vectors Gold Miners ETF ( GDX | A-55 ) has now slid more than 55 percent year-to-date, bleeding essentially half of its sticker price to drop to a five-year low. And yet, the fund has nearly doubled in size as investors continue to pour assets into it.

Since Jan. 1, GDX has seen net inflows of roughly $2.5 billion to become a $6.8 billion ETF despite a dismal price performance. The fund tracks a market-cap-weighted index of U.S.-listed global gold mining firms and is the biggest gold miner ETF in the market today.

Owning resource equities such as gold miners has certainly not been a money-making proposition if you consider that in the same time period, the broad U.S. stock market—as measured by the performance of the SPDR S&P 500 ETF (SPY | A-98)—has been making new record highs. Take a look at this chart that compares market action in GDX and in SPY year-to-date:

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But GDX, and other funds like it, such as the Market Vectors Junior Gold Miners ETF (GDXJ | B-33) continue to attract investors, particularly value investors, or the same types that are likely to buy gold on market dips, Paul Weisbruch, VP of ETF sales and Trading for Street One Financial told IndexUniverse.

“With stocks at record highs, miners may look relatively ‘cheap’ when compared to other sectors of the market,” said Hard Assets Investor commodities analyst Sumit Roy, who also warns that with more losses looming for gold in 2014, investors might want to “stay on the sidelines for now.”

Funds like GDX and GDXJ also appeal to many institutional investors, who turn to miner equities as their favorite proxy for gold. Most months this year GDX has seen positive net inflows, while the SPDR Gold Trust (GLD)—the largest physical gold ETF —has seen net asset outflows every single month this year, losing more than $23 billion year-to-date in assets under management.

 

That’s to say that even as gold prices remain under pressure in this environment of low interest rates, demand for some form of exposure to gold remains strong among many investors.

Interestingly, when it comes to gold miner funds, that demand isn’t always tied to value investors or long-term buy-and-hold types.

If you look at the Direxion Daily Gold Miners Bull 3X Shares (NUGT), for instance, the leveraged fund has now attracted net asset inflows of more than $1.3 billion despite a difficult year for returns—NUGT has slid more than 95 percent so far this year.

But its inverse counterpart, the Direxion Daily Gold Miners Bear 3X Shares (DUST) hasn’t been nearly as popular with investors even though shorting miner stocks would probably have been a good idea this year. In fact, DUST has seen net outflows of $12 million since the beginning of the year while it has tagged on gains of more than 220 percent.

Keep in mind that NUGT serves up three times leveraged exposure to a market-cap-weighted index of global gold and silver mining firms that is designed to be a one-day bet on the index. That’s to say investors are expected to hold onto the fund one single trading day because. In longer periods, the effects of compounding may cause it to drift from the 300 percent exposure it promises to provide to the underlying index. DUST is essentially the mirror strategy.

“Both of these products are designed to be short-term leveraged trading devices, if not used as part of aggressive hedging strategies, so asset flows will rarely be ‘sticky assets, at least in theory,” Weisbruch said.

“Several related products (to GDX) have also capitalized on the extreme volatility this year, and the rising popularity in trading the miners as a strategy or a hedge, specifically NUGT and DUST,” Weisbruch said.

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Charts courtesy of StockCharts.com

 

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