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Inside the New Sprott Zacks Gold Mining ETF

Inside the New Sprott Zacks Gold Mining ETF
April 10
04:56 2015

Gold miners are experiencing extreme volatility due to a combination of factors, including the prospect of an interest rates hike, a strengthening dollar and the growing U.S. economy. Yet the outlook seems bright, at least in the short term.

The maximum bullishness was witnessed in recent weeks when the Fed committed to slower-than-expected interest rates hike, citing lower inflation and moderate economic growth. In addition, the recent disappointing job numbers for March has raised the speculation that the Fed would further delay the rise in interest rates. This has resulted in a firming dollar, and in turn greater appeal for the yellow metal (read: Gold Mining ETFs Surging on Weak Jobs Data).

Further, rising volatility, global slowdown, deflation fears, and lofty U.S. stock valuations added to the strength. Given this, the new fund from Sprott Asset Management – Sprott Junior Gold Miners ETF (SGDJ) – hit the market at the perfect time and might be of great interest to investors seeking exposure to the gold mining industry.

Investors should note that this industry has a solid Zacks Industry Rank in the top 36%, suggesting their outperformance in the months to come.

SGDJ in Focus

This new fund looks to provide exposure to the small cap segment of the gold mining space by tracking the Sprott Zacks Junior Gold Miners Index. The benchmark utilizes a novel feature which seeks to outperform the passive market cap-weighted counterparts.

In total, the fund holds a small basket of 37 junior gold stocks with the strongest revenue growth and price momentum. It is concentrated on the top 10 holdings with the largest exposure to going to B2GOLD (BTG), Centerra Gold (CG) and First Majestic (AG). These three firms make up for a combined 20% share.

In terms of country exposure, Canada takes the lion’s share at 74%. The U.S. receives 15% share while South Africa and Australia round out the next two spots. Expense ratio came in higher at 0.57%.

How does it fit in a portfolio?

This ETF provides a new way to invest in the gold mining industry given its innovative and unique approach. This is especially true as it focuses on companies with a stronger growth potential that have the ability to outperform their cousins, thereby resulting in excess profits.

Apart from its novel concept, small cap gold stocks tend to rise higher than the large and mid cap counterparts in a rising gold market. Further, smaller companies could be potential acquisition targets if the industry consolidates. Their high-value discoveries and mine development will create enormous upside potential for these stocks, making the new fund an ideal investment.

ETF Competition

There is an appetite for this fund despite a good number of choices already in the space. The ultra-popular Market Vectors Gold Mining ETF (GDX) has been the most successful product with AUM of over $6.5 billion. Though it is skewed towards the small caps at 42%, mid caps make up for 35% of assets. It charges 53 bps in fees per year from investors.

The next is the small cap centric fund Market Vectors Junior Gold Miners ETF (GDXJ), which has amassed over $1.7 billion in its total asset base. It costs investors 57 bps in annual fees. Apart from this, other unleveraged funds that could provide stiff competition are the sponsors that own Gold Miners ETF (SGDM), iShares MSCI Global Gold Miners ETF (RING), and PowerShares Global Gold and Precious Metals Portfolio (PSAU).

Given this, the new product from Sprott might have difficulty in gaining inflows and solid investor interest until it proves itself as an outperformer in the space.

Source: Sweta Killa

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Sweta Killa

Sweta Killa

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