In the ETF world, mining is the business of getting metals and minerals out of the ground. Gold, copper, silver, iron, aluminum, phosphates, coal, limestone, gypsum, shale—a large part of any economy depends on the activities that the mining industry undertakes. In recent years, the demand for certain commodities has exploded. The following are mining ETFs that might fit your risk profile:
Market Vectors Gold Miners Fund (AMEX: GDX): When this ETF received its formal introduction in May 2006, it didn’t exactly grab the headlines by the horns, but when the Federal Reserve began shifting its attention toward rate cutting in the second half of 2007, investors worldwide began turning to gold as a safe haven.
By extension, miners who specialize in the extraction of gold benefited tremendously. 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.
The fund 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 and silver ore. The international flavor of GDX sounds good at first, but the country weightings demonstrate that 80% of the fund’s returns come from the mines in just two countries (64% from Canada, 13% from South Africa).
Is this problematic? Not really—that’s where the mines are. However, a sharp drop in gold and/or silver demand could prove damaging for GDX. The fund is roughly 1.5 times as volatile as the S&P 500.
Spider S&P Metals and Mining (AMEX: XME): For emerging and developed markets to meet the increasing demand for infrastructure, they require industrial metals and minerals. Enter the XME. This ETF endeavors to replicate the performance of the S&P Metals and Mining Select Industry Index, comprising 25 companies in the material/energy-acquisition business.
There’s a lot to like about this fund’s make up. It’s well diversified across steel producers, coal miners, and zinc and palladium extractors. Most of its companies account for similar movement of the fund, with weightings in the 4% range. Moreover, it has an enviable return on equity of nearly 20%.
There’s more. In the rallies that occurred off the January and March 2008 stock-market lows, 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. Of course, there’s the flip side to the nickel-plated coin. A more severe recession could hurt the industrial metal miners the most, as countries may not have the same need for materials in the ground. Indeed, XME has its fair share of risk. It too is 1.5 times as volatile as the S&P 500.
Market Vectors-Coal (NYSE: KOL): In January 2008, the Van Eck Group responsible for the Market Vectors series launched the first ETF to target the global coal industry. KOL seeks the performance of the Stowe Coal Index. What’s intriguing is that many of the companies in KOL are based in emerging, untapped markets like Thailand and Indonesia. One is certainly going to get a share of foreign exposure.
More worrisome than country risk, however, is the choice of companies in the Stowe Coal Index itself; that is, some participants produce coal and some consume coal. Producers would benefit from continued appreciation in the underlying commodity, while consumers might be hindered by inflated prices. Nevertheless, coal is used to produce 40% to 45% of the world’s electricity, and with supply disruptions throughout the emerging markets occurring regularly, KOL may be the quickest way to capitalize on rising demand.
There are a few other opportunities in the ETF world for those who take an interest in mining, metals, and natural resources. Yet it may make sense to turn to a select group of individual countries that are major exporters:
iShares MSCI Chile Index Fund (NYSE: ECH): This fund offers single-country exposure to a Latin American powerhouse, and it also offers exposure to a commodity integral to growing economies worldwide: copper. Chile accounts for nearly one-third of copper’s global production.
iShares MSCI South Africa Index (NYSE: EZA): South Africa is primarily known for its natural-resource wealth. Top holdings for EZA include highly correlated segments such as materials, energy, metals, and commodities. At least 50% of EZA is tied to materials and energy, with four of the top 10 holdings being mining companies and 42% of the fund’s assets in the top five holdings. This might be exactly what the aggressive investor is interested in.
— By Gary Gordon
Gary Gordon is president of Pacific Park Financial, an SEC-registered investment adviser in Aliso Viejo, Calif. He owns and operates www.ETFexpert.com and is the host of “In the Money” on 1700 AM in San Diego.
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