Digging Into Gold Mining ETF GDX

Joel Anderson |

A quick look at the most actively traded ETFs by average volume provides no surprise for the top name: the SPDR S&P 500 ($SPY) moves and average of 111 million shares a day. Coming in right behind it is the iShares MSCI Emerging Markets Index ETF (EEM) , also a predictable entry. However, some might be a touch surprised to see the ETF with the third-highest average daily volume: the Market Vectors Gold Miners ETF ($GDX).

While the majority of the ETFs traded the most actively are very broad, covering large swaths of the global economy, the GDX is much more specific, focusing entirely on one segment (gold) or one industry (mining). As such, GDX stands out for being an unusually narrow entry into the ETF category to attract so much attention.

Just Another Gold Play?

It’s not hard to see the main reason why GDX is so popular: gold. Gold bugs are notoriously voracious, and gold always seem to spark the imagination of investors across the globe. And, while gold investing usually takes the form of buying (or shorting) commodities and futures contracts, the GDX is a way to indirectly speculate on the price of gold while still using the familiar vehicle of an equities ETF. A quick comparison of gold spot prices and shares in GDX show that the value of GDX tends to mirror movements in the price of gold.

However, that’s not the whole story. Over the last year, movements in the spot price of gold are generally closely matched by shifts in GDX, but they tend to be magnified for GDX. And, taking it a step further, looking back of 5 years shows a pretty clear correlation between the two, but with the GDX showing considerably more independence. The GDX was more volatile while on the rise during 2009 and 2010, then fell much further when gold prices started their extended plunge in September of 2012. Over the last year, the price of gold lost about a quarter of its value, while GDX is off over 55 percent.

What’s in GDX?

So while investing in GDX is, in many ways, a proxy for investing in the price of gold, it’s not a perfect match. Mining stocks tend to experience swings in the price of gold more violently, rising higher and falling farther than the precious metal. They can also exhibit much greater volatility.

Anyone planning an investment into GDX should probably do their research, as a result. Because GDX is comprised of stocks in 37 different gold-mining companies, many of the fluctuations based on the situations of individual companies are evened out. However, that doesn’t mean that there aren’t a handful of major players that can greatly affect the ETF.

The GDX tracks the NYSE Arca Gold Miners Index. It has five different companies that consist of 5 percent of holdings or more. They are Goldcorp (GG) with 11.7 percent, Barrick Gold Corp. (ABX) with 10.56 percent, Newmont Mining Corp. (NEM) with 8.06 percent, Randgold Resources (GOLD) with 5.05 percent, and Yamana Gold (AUY) with 5 percent.

And Did You Say Dividend?

Perhaps one of the most important considerations, though, in investing in GDX instead of gold would be the ETF’s dividend yield currently sitting at just under 2.25 percent. Simply put, buying commodities or futures doesn’t pay a dividend. Owning gold means just that: you own gold. And that gold doesn’t care how you feel about any of it.

A gold mining company, though, has to treat you like it would any other shareholder. You own a piece of that company, and you share in its profits. As such, while you’re still susceptible to fluctuations in the price of gold, it’s a lot easier to hang onto a dividend stock through hard times than it is physical gold.

Gold Miner ETF is a Different Kind of Gold Play

Ultimately, like any mining stock ETF, GDX is tied tightly to the price of gold. However, that doesn’t mean that it’s simply another way to bet on the price of gold. The existence of a dividend, greater volatility, and a composition made up of several different companies each with their own individual circumstances makes GDX its own beast.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ABX Barrick Gold Corp. 17.40 0.79 4.76 16,260,598
AUY Yamana Gold Inc. 4.49 0.17 3.82 11,923,063
GG Goldcorp Inc 18.77 0.91 5.10 12,641,109
GOLD Randgold Resources Ltd. ADR 94.51 1.20 1.29 760,604
NEM Newmont Mining Corp. (Holding Co.) 32.77 0.67 2.09 7,216,729

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