The VanEck Vectors Gold Miners ETF was launched in May 2006. It consists of 53 gold mining companies with $15.1 billion in assets. The ETF tracks the NYSE Arca Gold Miners Index, but its value does not always mirror increases in the price of gold.
Basics
Gold is a traditional investment, often used as a hedge against inflation due to its inverse relationship with the U.S. dollar. Many professionals see it as a diversification tool to reduce risk. For a convenient gold investment without the physical commodity, consider the VanEck Vectors Gold Miners (GDX) ETF. It's highly liquid and offers exposure to gold mining companies. Established during a gold bull market, it caters to precious metals investors. Read on for details on its performance, composition, and suitability for your portfolio.
Overview and Performance
The VanEck Vectors Gold Miners ETF, the first of its kind in the U.S., started trading on May 16, 2006, on the NYSE Arca. The company believes in the growth potential of gold and gold companies due to factors like interest rates and corporate debt. Smaller gold firms have a history of outperforming larger ones.
As of 2021, the ETF held $15.1 billion in assets, with a 0.52% expense ratio and a 0.50% management fee. Its average daily trading volume was 18.5 million shares, closing at $36.18 per share.
Morningstar rated this ETF with three out of five stars overall as of March 31, 2021, compared to 61 other funds, indicating its mid-range performance. It received four stars for the three-year category and three stars for the five-year category, suggesting it outperformed its peers in these periods.
Holdings and Index Tracking
The ETF comprises 53 holdings, exclusively in stocks, with no bonds or cash. Most holdings are gold mining companies based in Canada, the United States, and Australia. As of March 31, 2021, the top five holdings were:
- Newmont (15.82%)
- Barrick Gold (11.54%)
- Franco-Nevada (7.85%)
- Wheaton Precious Metals Group (5.63%)
- Newcrest Mining (5.17%)
The ETF aims to mirror the NYSE Arca Gold Miners Index, which tracks the performance of gold mining companies. Larger companies have more influence in this market-capitalization-weighted index.
The portfolio undergoes quarterly rebalancing to align with changes in the benchmark index. Companies must generate a minimum of 50% of their revenue from gold mining to be eligible for index inclusion.
A Closer Look at GDX's Performance
As of 2021, GDX showed a year-to-date (YTD) negative return of -10% based on its net asset value (NAV). Its one-year NAV return stood at 38.98%, with a -0.75% return since inception. Although the ETF outperformed the underlying index's -10.04% YTD return, it underperformed on a one-year basis (39.10%) and since inception (-0.30%).
This performance is atypical, considering gold's 158% increase since the ETF's launch on April 22, 2021. The financial performance of gold mining companies, linked to gold prices, adds to the puzzle. The discrepancy can be attributed to these companies reducing production as gold prices rose and expanding operations when gold prices peaked. Such mismanagement has left many gold miner enthusiasts frustrated.
Risks and Returns of GDX
GDX presents risks; its shares may not rise with gold prices but can fall with gold's decline. In specific conditions, GDX can deliver substantial returns; from Oct 2008 to May 2011, it surged by nearly 300% as gold climbed 115% during the same period.
It's a speculative investment suitable for risk-tolerant investors. GDX's earnings hinge on the unpredictable short-term gold price, influenced by factors like financial uncertainty, inflation, and falling interest rates.
Gold's appeal increases during economic uncertainty and falling rates but wanes when rates rise, given its lack of income generation. Gold miners' stock prices rise in these conditions due to expected future cash flows, with profits directly linked to gold prices, offering leverage for those bullish on gold.
Conclusion
The VanEck Vectors Gold Miners ETF is designed for traders and investors who hold a bullish view on gold and are wary of inflation or potential financial crises, making it less suited for casual, long-term investors. While GDX can appreciate in value under favorable conditions, it's essential to note that its performance is significantly influenced by the management decisions of the companies within its portfolio, rather than solely depending on fluctuations in the price of gold.