A Different Type Of Gold Miners ETF

It is not a secret that gold and silver miners exchange-traded funds are topping their physically-backed counterparts in significant fashion this year. For example, the Market Vectors Gold Miners ETF GDX, the largest gold miners ETF, is up about 65 percent year-to-date, or more than triple the returns offered by the SPDR Gold Shares GLD.

Sprott Gold Miners ETF

Nearly all of the top 10 non-leveraged ETFs in terms of year-to-date performance are gold or silver miners funds, a group that includes the Sprott Gold Miners ETF (ALPS ETF Trust SGDM). SGDM, which is nearly two years old, represents a different approach to gold miners ETFs, most of which are traditional cap-weighted funds.

Related Link: How Overpriced Is Gold Right Now?

SGDM's underlying index “seeks to emphasize gold stocks with the highest quarterly revenue growth measured on a year-over-year basis and stronger relative balance sheets as measured by long-term debt to equity,”

SGDM's Methodological Success

“The Index aims to track the performance of large to mid-capitalization publically traded gold companies that are listed on major U.S. exchanges. The Index uses a transparent, rules-based methodology that is designed to identify 25 gold stocks with the highest historical beta to the spot price of gold, with each stock’s weighting in the Index adjusted based on its quarterly revenue growth on a year-over-year basis and the quality of its balance sheet, as measured by long-term debt to equity,” according to a statement issued by Sprott.

The methodology is working, as SGDM is higher by 66.4 percent year-to-date. However, a potential concern for investors looking to avoid stock-specific risk is that SGDM's top three holdings – Franco Nevada Corp FNV, Agnico Eagle Mines Ltd (USA) AEM and Goldcorp Inc. (USA) GG – combine for about 41 percent of the ETF's weight. No other stock garners a weight of more than 5.1 percent in SGDM's lineup. When SGDM came to market, its top three holdings represented 46 percent of its weight.

A variety of reasons have been cited as catalysts for the 2016 bullion bounce. Negative interest throughout the developed world and the Federal Reserve appearing as though it will not be able to raise U.S. borrowing costs by as much as previously thought are chief among those reasons.

For gold bugs, there is nothing wrong with safe-haven demand and 2016's market action is, to this pointing, reminding investors of gold's utility. In fact, gold has proven its mettle during market crises ranging from the Soviet sovereign debt crisis to the Long Term Capital Management meltdown to the global financial crisis.