Gold Mining ETFs Benefit Most From Fed Minutes

By Zacks Equity Research of Zacks.com

Thursday, August 20, 2015 1:14 PM EDT

The Fed minutes released yesterday signaled a slight dovish tone and have dented the chance of an interest rate increase next month, which would be the first in nearly a decade. This is because many Fed officials are concerned about soft inflation, tepid wage growth, and a global economic slowdown despite the fact that the U.S. job market is accelerating (read: ETFs to Lose or Gain from Solid July Job Data).

While unemployment fell to a seven-year low of 5.3%, inflation is still far below the Fed’s 2% target despite a six-year recovery. Consumer price increased for the sixth month in a row in July by 0.1%. This is slightly down from gains of 0.3% in June and 0.4% in May.

The recent resumption of the oil price slide and the persistent slowdown in the Chinese economy will also block the road of the Fed for a rates “liftoff.” Notably, U.S. crude tumbled to below $41 per barrel while Brent dropped to less than $47 per barrel. Lower commodities’ prices will continue to be a drag on inflation, leading to uncertain timing for a rates hike.

The turmoil in China has triggered worldwide worries raging from a rout in global stocks to a brutal slump in commodities. The global fears deepened when China devalued its currency renminbi by 2% against the U.S. dollar that made Chinese exports cheaper and imports into China expensive. The move will likely impact the trade in key markets of the Asia-Pacific region and many other emerging markets, hurting their economic growth (read: China Currency Devaluation is Awful News for These ETFs).

All these concerns might delay the rate hike to until December, meaning that cheap money will flow into the market for another quarter. This resulted in a sharp decline in the U.S. dollar against a basket of major currencies and gave a boost to the gold price. In fact, gold price jumped to the highest level in nearly five weeks and is on track to log in the second weekly gain, ending its longest retreat since 1999.

Over the past couple of months, gold has been under immense pressure from a rising interest rates concern, as higher rates would dull the shine since the yellow metal does not pay any interest like the fixed-income assets. Now, the delay in timing as well as global concerns would compel investors to turn their focus on gold as a store of value. Acting as a leveraged plays, gold miners tend to experience more gains than the gold bullion.

As a result, we have highlighted four gold mining ETFs that benefited the most from the Fed minutes on the past trading session and will likely to continue its strong performance at least in the near term.

ALPS Sprott Junior Gold Miners ETF ((SGDJ - ETF report)) – Up 4.58%

This fund targets the small cap segment of the gold mining industry by tracking the Sprott Zacks Junior Gold Miners Index. The benchmark utilizes the factor-based methodology that seeks to emphasize companies with the strongest relative revenue growth and price momentum. In total, the fund holds a small basket of 33 stocks with the highest allocation to the top firm – Centerra Gold (CG - Snapshot Report) – at 9.3%. Other firms hold less than 5.7% of assets.

In terms of country exposure, Canada takes the largest share at 73% while the U.S. receives just 13% of SGDJ. The fund has accumulated $22.2 million in AUM since its debut in March and sees paltry volume of less than 17,000 shares. Expense ratio came in higher at 0.57% (read: Inside the New Sprott Zacks Gold Mining ETF).

Market Vectors Junior Gold Miners ETF ((GDXJ - ETF report)) – Up 3.35%

This is also a small cap centric ETF that tracks the Market Vectors Global Junior Gold Miners Index. Holding 62 stocks in its basket, it is pretty well spread out across each component with none holding more than 4.36% of assets. Canadian firms dominate the fund’s portfolio at 60.3%, though Australia (14.9%) and the U.S. (9.8%) round out the top three.

The product is by far the largest and most popular in the gold mining space with AUM of $1.3 billion and average daily volume of more than 11 million shares. It charges 55 bps in annual fees.

Sprott Gold Miners ETF ((SGDM - ETF report)) – Up 3.20%

This fund follows the Sprott Zacks Gold Miners Index, holding 26 stocks in its basket. It is highly concentrated on the top four firms – Franco-Nevada (FNV -Snapshot Report), Randgold Resources (GOLD - Snapshot Report), Goldcorp (GG - Analyst Report) and Newmont Mining (NEM - Analyst Report) – that collectively make up for 46.3% share. The product is skewed toward mid caps at 56% while the rest goes to small caps.

The fund has amassed $123.5 million in its asset base and trades in good volume of over 119,000 shares a day. It charges 57 bps in annual fees from investors.

Market Vectors Gold Mining ETF (GDX) – Up 2.91%

This is the most popular and actively traded gold miner ETF with AUM of $4.6 billion and average daily volume of more than 43 million shares. The fund follows the NYSE Arca Gold Miners Index, holding 40 stocks in its basket (see: all the Material ETFs here).

Canadian firms account for 54.7% of the assets, followed by the U.S. (13.7%) and South Africa (9.1%). The product has some concentration issues, as it allocates 54.1% to the top 10 firms. GG, NEM and FNV occupy the top three positions in the basket. It is evenly split between mid and small caps.