Monday, 12 September 2016

Designed to outperform

A benchmark among Large Cap Gold Miner ETFs

The first severe correction since the onset of the gold miner recovery that started late January raised doubt and fear among investors. Not surprisingly miners gave way much more than did precious metals. As a result miners slid from overvalued relative to where gold was a month ago to undervalued at present.
If you feel this needs being quantified, the HUI/Gold regression can provide you with the detail you like. Overvaluation or undervaluation can be estimated by the residual relative to the regression line. Negative residuals indicate that the gold market neutral value of the HUI is above its current value, which is the case since late August.

Investment sentiment turned sour rather quickly as gold miners fell out of favour: on August 12, overvaluation peaked at a residual reading of 32.9. By August 24 valuation had been turned towards a gold market neutral reading, with residuals around 0 during a few days. By August 30 miners started lagging gold. Despite the early September recovery, miners only approached the gold market neutral valuation but later sold off, again lagging gold. By Friday Sept 9, the HUI lags gold by over 11 points.

Individual miner response on gold market moves

The July blog article: The rising tide lifting all boats (?) pinpointed how many of the poor performers made stellar gains during the first months of the gold market recovery. Yet they still fall short over the long haul when compared to financially more solid miners. The 'best of class' miners avoided negative cash flows even as gold bottomed, had incurred smaller bear market declines and hence did not need a magnificent rally to turn a long term decline into a solid advance.

As miner sentiment turned sour again, it is most likely that miners which sky rocketed during the start of the rejuvenated gold bull market are exactly those which once more will be suffering quite hefty losses during this downturn.

Sprott Asset Mgt ETF's: Designed to outperform

Gold mining ETF's, especially with focus on large-cap miners, have a limited universe to choose from. Restrictions of market capitalization and liquidity shorten the list. Any performance gap is mainly due to differences in weighing the components. There may be more ample choice for junior miners and explorers. As such justifying any particular choice for juniors in an ETF is less evident. Hence we will leave aside SGDJ and GDXJ in our benchmark.

Our focus will be on the Sprott Gold Miners ETF (SGDM) and Van Eck's Vectors Gold Miners ETF (GDX). The latter is by far the largest ETF of this market segment in terms of total market capitalization ($ 9.58 Billion). Moreover it has the longest track record, going back to May 2006.  SGDM is relatively recent, going back to July 14, 2014 and its market capitalization only amounts to $ 214 Million.

The below tables list the top ten components for both ETF's as they are today. Composition and weights of both ETFs will of course vary over time.

Sprott Gold Miners ETF (SGDM)

SGDM Top Holdings (71.93% of Total Assets)
Symbol Company Name % Assets
GOLD Randgold Resources Ltd 18.59%
AEM Agnico Eagle Mines Ltd 12.55%
RGLD Royal Gold Inc 12.40%
PAAS Pan American Silver Corp 4.58%
ABX Barrick Gold Corp 4.40%
AU Anglogold Ashanti Ltd 4.35%
BTG B2Gold Corp 4.19%
AG First Majestic Silver Corp 3.89%
BVN Buenaventura Mining Co Inc 3.88%
KGC Kinross Gold Corp 3.10%

VanEck Vectors Gold Miners ETF (GDX)
GDX Top Holdings (59.29% of Total Assets)
Symbol Company Name % Assets
NEM Newmont Mining Corp 9.87%
ABX Barrick Gold Corp 9.79%
GG Goldcorp Inc 6.13%
NCM Newcrest Mining Ltd 6.04%
FNV Franco-Nevada Corp 6.02%
AEM Agnico Eagle Mines Ltd 5.45%
SLW Silver Wheaton Corp 5.45%
GOLD Randgold Resources Ltd 4.49%
AU Anglogold Ashanti Ltd 3.43%
KGC Kinross Gold Corp 2.62%

Remark that the Sprott Gold Miners ETF is much more concentrated with the top 10 components adding up to close to 72% of the total weight. For GDX, VanEck's Vector Gold Miners ETF the total weight of the top-10 falls short of 60%.

The most important components in the SGDM are Randgold Resources and Agnico Eagle. Both of them withstood the bear market rather well, as compared to the heavyweights of the HUI index such as Newmont Mining and Barrick Gold, which are the top components for GDX.

You may expect that SGDM will again resist better any aggravating correction or bear market that may follow. 

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