New ETFs On The Block: Sprott Gold Miners ETF (SGDM)

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78528590Gold-focused funds experienced a turbulent 2013 after Former Fed Chair Ben Bernanke announced the end of asset purchases in May. Gold miners were no exception, and many funds lost 50 percent or more value in the following months.

However, 2014 has been a totally different story and many gold miner exchange-traded funds came out on top though volatility in the space generally remained elevated. While Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) added 23.43 and 31.95 percent respectively, many gold mining benchmarks are up nearly 20 percent year-to-date despite the recent slump, easily beating the S&P 500.

Against such favorable setting, Sprott Asset Management, a Toronto-based precious metals specialist, unveiled the Sprott Gold Miners ETF (SGDM) recently. Listed on the NYSE, the new fund will track the Sprott Zacks Gold Miners Index, a rules-based index that is rebalanced quarterly.

Additionally, SGDM seeks to employ the ‘smart beta’ strategy in the gold-mining space with an aim to generate some outperformance through a passive, market-cap weighted representation of gold miners.

The index uses a factor-based and transparent methodology designed to identify 25 US-listed large- to mid-capitalization, gold and, to a lesser extent, silver miners, with the highest historical beta to the spot price of gold.

Each stock’s weighting in the index is decided by quarterly revenue growth, measured on a year-over-year basis, and the strength of balance-sheets as measured by long-term debt to equity ratio. Nearly 90 percent of SGDM’s of allocations go to gold miners while silver miners get the remaining 10 percent. The top three holdings, i.e. Franco-Nevada, Randgold Resources and Goldcorp Inc alone corner more than 45 percent of total assets, making SGDM a top-heavy fund.

The new funds timing seems decent despite the presence of about 10 funds in that space. Sprott’s own research shows gold miners are trading at multi-year lows based on a number of valuation metrics and the stocks have lagged spot gold prices since April 2011.

After a recent spate of cost-cutting measures across the industry and given their low valuations, many investors believe miners have more headroom to move.

SGDM has an annual expense ratio of 57 basis points.

Disclosure: No holdings

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