Gold Mining ETFs in Trouble Again

Zacks

Gold miners are under pressure once again after a surprise jump in U.S. jobs growth and stronger-than-expected 2.8% GDP growth in the third quarter. These apparently encouraging data points reignited fears of a monetary stimulus cut from the Fed soon that would boost the dollar against a basket of major currencies and dampen safe haven appeal across the board.
 
This bearish trend is further confirmed by rising worries about tightening policy in China in order to prevent a flare-up in property prices and growing inflation, and European Central Bank’s surprising rate cuts (read: China ETFs Slide on Cash Crunch Fear).
 
Moreover, demand in India, the biggest consumer of gold, remains soft as government has curbed imports and investors are shifting their exposure to surging equity markets.     
 
Thanks to this news, gold futures for December delivery have slumped from about $1,323/oz. at the end of October to the current level of below $1,280/oz., suggesting a bearish sentiment in the space. Notably, the yellow metal is heading for its first annual decline in 13 years.
 
Investors should note that gold bullion is down nearly 24% in the year-to-date time frame and might decline further in the coming days if we see another round of strong economic data (read: No Respite for Gold ETF Bear Run).
 
Usually, gold miners trade as a leveraged play on underlying precious metals. This means that when gold prices slump, gold miners lose even more, as they tend to experience extreme losses when compared to their bullion cousins.
 
Market Impact
 
In such a backdrop, gold miners are certainly being hit hard by gold bullion’s slump, as top gold mining ETFs like Market Vectors Gold Mining ETF (GDX), Market Vectors Junior Gold Miners ETF (GDXJ) and iShares MSCI Global Gold Miners ETF (RING) saw loses near double digits in the past 10 trading sessions.
 
This was a lackluster performance considering that the ultra-popular SPDR Gold Trust ETF (GLD) and iShares Gold Trust (IAU) posted losses of nearly 5% over the past 10 days (read: Gold Mining ETFs Rebound: Can It Last?).
 
Gold Mining ETFs in Focus
 
With AUM of over $4.6 billion and an average daily volume of more than 36 million shares, GDX is the most popular ETF in the gold mining space and tracks the NYSE Arca Gold Miners Index. Canadian firms account for roughly three-fifths of the assets while the U.S. (13.2%) and South Africa (9.3%) round out the top three.
 
The fund holds 37 stocks in its basket with heavy concentration to top two Canadian firms - Goldcorp (GG) and Barrick Gold (ABX) at 11% each and one U.S. firm – Newmont Mining (NEM) at nearly 8%. The product charges 52 bps in fees per year from investors.
 
GDXJ follows the Market Vectors Global Junior Gold Miners Index, and is roughly evenly split between small and micro-cap securities, holding about 71 securities in its portfolio. Once again, Canadian firms take the lion’s share at 59.5%, though Australia (22.1%) and the U.S. (9.4%), round out the top three (read: Gold Mining ETF Investing 101).
 
The ETF is also much more spread out than its counterparts, as none of the securities holds more than 4.51% of total assets. The product has amassed about $1.3 billion in its asset base and sees solid trading of nearly 1.1 million shares a day. The ETF has a 0.55% expense ratio.
 
RING is the cheapest choice in the gold mining space, charging just 0.39% in fees and expenses. The fund is less popular and less liquid with AUM of $36.4 million and average daily volume of less than 78,000 shares. The ETF tracks the MSCI ACWI Select Gold Miners Investable Market Index and holds 38 securities in its portfolio. 
 
Similar to GDX, the product is heavily concentrated in the top three firms – GG, ABX and NEM – which combine to make up for nearly 40% of total assets. Country holdings are also similar, with Canada as the top country, followed by the U.S. and South Africa.
 

 
Bottom Line
 
This is an extremely rough patch for gold mining ETF investors, with most products losing double digits in the past few sessions. And given the sluggish outlook for gold, strong U.S. data, surging dollar and threat of reduced QE, this trend might continue in the weeks ahead (see: all the Materials ETFs here).
 
Further, the gold miners’ stocks have a relatively long history of underperformance. Given this, investors should take great caution when investing in this once safe haven or avoid digging up trouble with these products for the time being.
 
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