Commodity Trade Mantra

Why ‘New Approach’ to Gold Miners ETF Could Benefit Investors

Why ‘New Approach’ to Gold Miners ETF Could Benefit Investors

Why ‘New Approach’ to Gold Miners ETF Could Benefit Investors

The new Sprott Gold Miners ETF (NYSE: SGDM) was launched in July. SGDM focuses on major mining and streaming companies and offers investors an innovative new way to gain exposure to gold equities.

The Sprott ETF provides all the aspects of traditional ETFs that investors like – a low management fee (0.57%), passive management, exposure to a diversified basket of stocks, and full disclosure of holdings on a daily basis – with an alternative indexing methodology for selecting the holdings of the portfolio.

John Ciampaglia, who led the development of the ETF at Sprott Asset Management LP, said SGDM tracks the Sprott Zacks Gold Miners Index, the first index to use qualitative company factors to select and weight gold stocks. He said:

“Traditional gold miner indexes select their holdings in a very simple way: stocks are ‘market-cap weighted,’ which means the biggest companies in the sector are also the largest holdings in their portfolio.”

“In the mining sector, having the majority of your exposure allocated to the biggest mining companies can be dangerous. Bigger is not always better,” says Rick Rule, Chairman of Sprott US Holdings. “Currently, high debt loads, operational cost overruns, and lost revenues from projects that have been placed ‘on ice’ are weighing on a lot of the biggest players in our sector. Some of the biggest companies in the mining sector have long histories of destroying shareholder value. To us, taking a more thoughtful approach to creating an index makes a great deal of sense.”

The Sprott Zacks Gold Miners Index, which dictates the holdings of SGDM, places emphasis on gold stocks that display the best revenue growth and balance sheet strength. The Index is rebalanced on a quarterly basis to ensure that the latest company results are reflected in the composition and weighting of the Index.

So what are the top holdings in SGDM right now?

Royalty and streaming companies currently make up a large share of the portfolio. These companies buy up future revenue streams from mining companies or juniors, but don’t bear the operational expenses themselves. This gives them substantial upside to the price of gold, and their generally low debt levels makes them financially stronger and less vulnerable to sector downturns.

The 2nd largest holding right now is Franco-Nevada Corp. at 15.8%, the largest royalty and streaming company in the world, founded by Pierre Lassonde. Royal Gold (4.5% holding) and Silver Wheaton (3.0% holding), two other big streaming companies, are also represented because of their strong relative revenue growth and lower debt ratios.

SGDM does hold a number of traditional mining companies but, because of their high debt ratios and lack of revenue growth in recent quarters, some of the biggest gold miners in terms of market cap currently make up a relatively small percentage of the portfolio. Among traditional gold miners, Randgold Resources, is currently the top holding (15.9%). Its gold production for the second quarter of 2014 was 277,283 ounces, which was an increase of 41% over the same period last year*.

“We believe we have constructed an ETF that is well suited to investors looking for an alternative to existing market-cap weighted gold miners ETFs,” said Rick. “Sprott has a long and successful history of investing in gold equities and we are happy to provide our clients with a new way to participate in the ongoing recovery in the sector.”

 
Courtesy: Henry Bonner via Sprott Group

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