Gold has been firing on all cylinders, breaking the $2,000 per ounce level for the first time early this month. The most recent rally was driven by hopes of additional stimulus to revive a pandemic-ravaged economy and a weakening dollar.
A stimulus bill could add liquidity to markets and weigh on rates, which would further support the precious metal. Meanwhile, a weak dollar against major global currencies raised the metal’s attractiveness, as it does not pay interest like fixed-income assets (read: 4 ETF Zones Making the Most of a Weakening Dollar).
Additionally, coronavirus cases continued to surge in the United States and dozens of U.S. states have had to pause or roll back their reopening plans. The rapid rise in cases in recent months has dented hopes of an economic recovery, sending the five-year Treasury yield to a record low. Further, rising tensions between the United States and China, and the upcoming presidential election are boosting the appeal for the metal as a great store of value and hedge against market turmoil. This coupled with the continuation of massive monetary and fiscal stimulus would drive gold prices higher.
Given the bullishness, investors are betting on gold in flocks and the trend is likely to continue in the weeks ahead. While there are physical gold, futures and gold stocks to play the rally, investors should look at the ETF options, which are more liquid, transparent and tax efficient.
Investors seeking to tap the ongoing rally in the commodity futures market could consider SPDR Gold Trust ETF GLD. For those looking to invest in the equity market, VanEck Vectors Gold Mining ETF GDX appears as an interesting choice. Both the funds are ultra-popular in their respective segments but are different in nature. Let’s see which of the two is better. Below we have highlighted some key differences between the two:
Investment Objective
GLD is an investment trust providing an efficient way to obtain market exposure to the price of gold bullion. It is the first U.S. traded gold ETF and the first U.S.-listed ETF backed by a physical asset. On the other hand, GDX offers exposure to the companies involved in the gold mining industry by tracking the NYSE Arca Gold Miners Index (read: How to Bet on the Gold Frenzy With ETFs & Stocks).
Holdings
The commodity-baked ETF is kept in London under the custody of HSBC Bank USA. The Trustee does not actively manage the gold held by the Trust. It means that the Trustee does not sell gold at times when its price is high or acquire gold at low prices in the expectation of future price increases. Also, the Trustee does not make use of any of the hedging techniques available to professional gold investors to reduce the risk of losses resulting from price decreases.
Meanwhile, GDX holds 53 securities in its basket with higher concentration on top two firms with a double-digit allocation each. Canadian firms account for 44.3% of the portfolio while the United States (17.8%) and Australia (14.4%) round off the top three.
Popularity and Pricing
GLD is much bigger than GDX as it has AUM of $82.4 billion versus that of $18.4 billion for the latter. Also, it is less expensive with an expense ratio of 0.40%, 12 bps lower than that of GDX. However, gold-mining ETF is much more liquid with average daily volume of 31.2 million shares compared with trading volume of 11.4 million shares a day on average for GLD.
Asset Flows
GLD has been the top asset creator per etf.com, having accumulated more than $20.9 billion, while the gold mining ETF has seen outflows of $79.2 million so far this year.
Performance
From a year-to-date look, GDX is heading higher, having gained 46% while the commodity-linked ETF is up 33.5%. The outperformance of the gold miner ETF came as mining companies tend to experience more gains than their bullion cousins in a rising metal market since they act as a leveraged play on the underlying metal prices (read: Silver ETFs or Gold: Which Metal to Shine More Ahead?).
Additionally, a slew of better-than-expected earnings releases from gold mining companies added to the strength. Some American companies with maximum holding in GDX, like Agnico Eagle AEM, Kinross KGC and Kirkland Lake KL, came up with an earnings beat and stronger revenues. Further, the gold mining industry belongs to a favorable Zacks Rank (placed at the top 20% of 250+ industries).
However, metal producers had to suspend production, slow project construction or curb their operations in accordance to government’s mandates to contain the spread of coronavirus. This might have impacted production in the last quarter. In this scenario, miners have been committed to cut operational costs and capital spending, improve operating efficiency within existing mines, and pay down debt. These actions along with lower oil prices, which make up a significant portion of a miner’s costs, might have boosted margins (read: Gold ETFs to Log Best Week Since March: Winning Bets).
Bottom Line
Based on the above discussion, the gold miner ETF has been outperforming and does not solely depend on the yellow metal’s price. It takes into account various other industry factors and company-specific risks. On the other hand, GLD is the pure play on the commodity’s strength.
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