Written by Gary Gordon, MS, CFP(R) of www.ETFexpert.com
The Market Vectors Gold Miners Fund (GDX) received its formal introduction in May of 2006... nearly 2 years ago. It didn't grab the headlines by the horns. However, when the Federal Reserve began shifting its attention towards rate cutting in the 2nd half of 2007, investors worldwide began turning to gold as a safe haven.
Miners who specialize in the extraction of gold, by extension, benefited tremendously. The Market Vectors Gold Miners Fund (GDX) surged on high volume alongside the continually rising price of the underlying metal. On an average day, more than 4,000,000 shares of GDX trade hands.
GDX tracks the Amex Gold Miners Index and seeks to replicate its total return. The index itself gives targeted exposure to roughly 30 companies around the globe that mine for gold or silver ore.
Although the international flavor for GDX sounds favorable, 80% of the fund's returns come from the mines in just 2 countries (64% Canada, 13% South Africa). This could be problematic, as the recent blackouts and shutdowns of mines in South Africa demonstrate.
However, country risk is not the big concern with the Market Vectors Gold Miners Fund (GDX). A sharp drop in gold and/or silver demand could prove the most damaging. Moreover, the fund is roughly 1.5 times as volatile as the S&P 500.
If you are less inclined to favor precious metals alone, and if you prefer a bit of iron/zinc/steel in your investing diet, then the Spider S&P Metals and Mining Fund (XME) may be your meal ticket. It has an enviable ROE (return on equity) of nearly 20%.
And there's more. In the rallies that occurred off the January stock market lows and March stock market lows, the Spider S&P Metals and Mining Fund (XME) was a leader of the pack. The prevailing theory seems to be that, if a global recession can be avoided, worldwide demand for what the miners "dig up" will continue. (Read more about XME here.)
But make no mistake... mining stocks are not for everyone. Macro-economic forecasts may favor the demand for what these producers are producing. Then again, a global economic slowdown could potentially hit these ETFs the hardest.
Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.