Thursday, 12 June 2014

Precious Metal Mining ETFs: a benchmark

The 2013 cyclical gold bear market and the crash of precious metal mining stocks leaves investors shattered. Some have been lured in again during the early 2014 recovery, while others are waiting to get their toes wet. A few mining analysts left the scene, while many saw their audience dwindle. Investors with limited funds and/or time for a due diligence study may gain exposure to the precious metal mining sector through purchasing one of the exchange traded funds (ETF's).
Even among ETF's there now is ample choice, which imposes some narrowing down. In this benchmark exercise, I will focus on ETF's with some historic data available and a clear 'sub-sector focus'. However well diversified the Central Fund of Canada (CEF) may be, its focus is on bullion investments. Hence it doesn't really fit in our approach. Nor will I consider the leveraged exchange traded gold miner bull (NUGT) and bear (DUST) products. These speculative trader's tools are not suitable long term investments, as pointed out by the emittor Direxion, see "ETF-suitability".

When comparing mining ETF's to the underlying metal, I will use the popular bullion ETF's GLD and SLV for gold and silver. The benchmark covers following ETF's:
  1. GDX, Van Eck's large-cap Gold Mining ETF,
  2. GDXJ, Van Eck's junior Gold Mining ETF,
  3. SIL, the Global X Silver Mining ETF,
  4. GLDX, the Global X Gold Explorer ETF.
Among these, GDX has a track record going back to May 2006 and a market capitalization exceeding seven billion USD, despite the crash of mining shares. When making relative plots, I will use GDX as a reference benchmark.

Miner ETF's relative to bullion ETF's

Off we go with a first graph with daily observations over 6 months for each. Click on any of the graphs to view their true size and full resolution:
GDX relative to bullion ETF GLD, daily observations over 6 months
GDXJ relative to bullion ETF GLD, daily observations over 6 months
GLDX relative to bullion ETF GLD, daily observations over 6 months
SIL relative to bullion ETF SLV, daily observations over 6 months
Going back six months allows making a favorable comparison: relative valuation bottomed early December 2013 as precious metals were grinding lower and despair overtook mining investors in what has been the worst cyclical mining bear market of the 21st century. As often, the devil is in the details: GDX shows a lower trough to peak range than do any other of the gold mining ETF's. The early 2014 recovery (ending about mid-March) was less vigorous for major gold miners. The curve profile for GDXJ, the junior gold miner ETF, is similar. In both cases the 200 dma (in red) continues grinding lower. The 50 dma climbs above the 200 dma by the end of the recovery and again slides below, making a death cross, mid May for GDX and early May for GDXJ. By then, the last leg down of this major correction starts.  For the gold explorer ETF, GLDX, the recovery has been more vigorous and the 50 dma outlasts its decline towards the 200 dma till early June. The 200 dma has been flat to slightly positive from March till mid May.
Last graph is the silver miners ETF, SIL, for which the benchmark of course is the silver bullion ETF, SLV. SIL compares favorably in its performance relative to silver bullion: not only the 200 dma resumes an uptrend from February '14 onward, the 50 dma makes a golden cross before the end of February and continues above the 200 dma since. SIL/SLV only recently broke below its 200 dma and is on its way to regain that level. The three other ETF's definitely have some work to do before even coming near! As for the short term, the order of performance is : SIL, GLDX, GDX, GDXJ.

Miner ETF's relative to bullion over the long haul

Weekly obeservations allow going back in time three years. That leads us to 2011: just after silver dropped out of its parabolic rise (but it made another secondary high in September) and before gold reached its all time high in August 2011. We make the same comparisons as above. Click any of the graphs to view the detail at true size.

GDX relative to bullion ETF GLD, weekly observations over 3 years

GDXJ relative to bullion ETF GLD, weekly observations over 3 years

GLDX relative to bullion ETF GLD, weekly observations over 3 years

SIL relative to silver bullion ETF SLV, weekly observations over 3 years
We more or less get graphs as expected: gold miners are grinding lower relative to gold bullion. The recovery in the summer of 2012 can still make a difference. Later on the valuation of miners keeps eroding, a process which is only accelerated by the cyclical gold bear market starting in April 2013. The August 2013 recovery is reduced to an upward blip, followed by an early 2014 recovery only little more easy to distinguish.  GDXJ shows a similar profile, but once more the devil is in the details: the range for that graph is about twice that of GDX.  This implies that value for the junior miners has been eroding at a much higher pace than that of the gold mining majors.  GLDX doesn't do any better: again the scale extends over a factor slightly more than four. Relative to gold bullion, explorers had lost 75% of their value by December 2013. The 2012 recoveries have barely had any influence on explorers. The August 2013 recovery reaches about the level of the early 2014 recovery. Nor GDX, nor GDXJ reached their August 2013 level during the early 2014 recovery. Has GLDX turned a corner? Poor comfort after being sliced to a quarter relative to bullion.

Global X Silver Miners ETF, SIL

This is a completely different story: the Y-axis extends over less than a factor of two. Moreover, valuation seems to oscillate as a function of time. There is no systematic decline, though on balance we end lower, after suffering a heavy loss as silver failed to uphold $20 in December 2013. The early 2014 recovery is phenomenal. The correction afterwards leaves about half of the relative gains, though silver is even down year-to-date, against a gain for gold. The silver miner ETF has shown a resilience leaving the three gold mining ETF's leagues behind.

Performance order over 3 years:

SIL, GDX, GLDX, GDXJ (giving GLDX the benefit of the doubt because of it recovering better early 2014).

Composition and asset concentration

You may download the present compositions from the sites of Van Eck or Global X. The small table below gives the number of components in the ETF and the smallest number of components needed to cover at least 50% of total assets. This last number gives a good idea on asset concentration. An ETF with as much as 100 different miners in portfolio, but with the top 5 covering over 50% of total assets is less well diversified than an ETF with only 30 components for which you need the top 10 to reach 50% of total assets. Market capitalization is indicated in million USD as of May 30.

ETF Number of components Top number covering 50% Market capitalization
GDX 41 10 7234
GDXJ 65 16 1731
GLDX 20 9 37
SIL 27 9 206

Despite the lower number of components for GLDX, the portfolio is little concentrated as close to half the number of components is needed to get over 50% of total assets. The 65 components for GDXJ hide a more concentrated portfolio in which less than a quarter of the largest positions add up to over 50% of assets. The same accounts for GDX.

Below you find the largest three positions for each of the ETF's.

GDX:
Goldcorp Inc
Barrick Gold Crp
Newmont Mining

GDXJ:
Primero Mining Corp
Semafo Inc
Oceanagold Corp

GLDX:
ATAC Resources LTD
PAPILLON Resources LTD
PRETIUM Resources INC

SIL:
SILVER WHEATON Corp
FRESNILLO PLC
PRIMERO MINING Corp
Note that both SIL and GDXJ are including Primero Mining, a mixed gold and silver producer (with mines in Mexico and Canada) among their top holdings. Primero acquired Brigus Gold in March, highly contributing to its Canadian operations.

Benchmark of three mining ETF's relative to GDX

We now use GDX as the benchmark to check performance of the three other ETF's against. GDX is by far the largest ETF, with a market capitalization of over 7 Billion USD. It also has the longest track record. By now all ETF's listed have at least three years of data available; this makes all observation periods in the below graphs equal.

GDXJ relative to GDX, weekly observations over three years

GLDX relative to GDX, weekly observations over three years

SIL relative to GDX, weekly observations over three years
Little explanation is needed here. We conclude that both the junior mining ETF, GDXJ, as the gold explorer ETF, GLDX, have been lagging relative to GDX. Both have however been outperforming GDX during the early 2014 recovery. On balance the poor performance remains cumbersome. It have been tough times for juniors and explorers.

SIL is the only ETF outperforming GDX. This is not only due to silver bullion giving way much more than gold has. With the denominator down, it is easier for the ratio to keep up. But put otherwise: even with their main revenues down more, silver miners have shown a remarkable resilience. Streamer company SILVER WHEATON, the top component in SIL, is upholding much better than the broad selection of miners. That also makes SIL outperform its peers.

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Further reading: A benchmark of mining ETF's as of October 2012 has been described in an earlier posting: Benchmark of precious-metal mining ETFs

1 comment:

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