Sprott Asset Management is practically synonymous with gold and precious metals investing. Its founder—Eric Sprott—has been pounding the table on the precious metals and the miners for more than a decade and he has been dead on. Now Sprott offers investors a new way to get exposure to the gold mining sector beyond the Market Vectors Gold Miner ETF (NYSEARCA:GDX) and its brother the Market Vectors Junior Gold Miner ETF (NYSEARCA:GDXJ) with its latest offering—the Sprott Gold Miners ETF (OTCMKTS:SGDM).
What makes it so appealing? There are two aspects of this fund that I like when compared with the other gold miner ETFs on the market. The first is that it doesn’t simply try to mimic a market-cap weighted index. Most indexes you come across are what is known as “market-cap weighted,” meaning the higher a company’s market cap the more room it takes up in the index. This is bad news, because as an investor you want to own undervalued companies as opposed to overvalued companies, but an overvalued company is more likely to have a larger market capitalization and be more heavily weighted in a market-cap weighted index. Funds such as GDX overweight the larger gold miners, and these have a greater likelihood of being overvalued.
The Sprott Gold Miners ETF weights stocks based on fundamental attractiveness such as growth, and strong balance sheets. Its largest holding—Franco Nevada Gold (NYSE:FNV)—is a fast growing company with a large cash position and no debt. The largest holding in the GDX is usually Barrick Gold (NYSE:ABX), which is a company that has a lot of debt and declining gold production!
The second thing that makes the Sprott Gold Miners ETF attractive is that each quarter the fund is re-weighted. This means that the fund is going to take profits on its outperformers and reallocate this capital to the underperformers. The Market Vectors Gold Miner ETF does no such thing. In fact when the fund sees capital inflows, it pumps more money into the top performers because these are the companies that become the highest weighted stocks in the fund.
In short the Sprott Gold Miners ETF tries to retain the passive indexing methodology by holding a diversified basket of gold miners while employing just a couple simple tactical strategies in order to enhance returns.
While the fund is relatively small and illiquid now, I suspect that as longer term investors look to allocate capital towards gold miners they will see that the Sprott fund employs strategies that are in tune with common sense investment strategies and look to buy these shares. I think that if you are an investor looking to own gold miners but don’t have the time to research individual companies then you should do the same and buy this new fund.
Some of its top holdings include:
- Franco Nevada, which we have seen is a fast growing company with no debt.
- Randgold Resrouces (NASDAQ:RGLD), one of the fastest growing gold miners with low costs and no debt. Note that Randgold Resources has generated incredible long term returns over the years thanks to its highly disciplined capital allocation strategy.
- Goldcorp (NYSE:GG), which is another fast growing gold miner that has quietly become the largest (or the second largest on some days) gold mining company by market capitalization thanks to successful growth initiatives and low debt.
If we look at the long term performance of each of these stocks, we find that they have substantially outperformed the sector as a whole, and they have offered investors leverage to the gold price. Meanwhile the Market Vectors fund has heavy allocations to lousy performers such as Barrick Gold, Gold Fields (NYSE:GFI), and Harmony Gold (NYSE:HMY), which have suffered from political and labor issues, rising costs, and stagnant production.
For these reasons I urge investors who are considering buying gold stocks to consider the Sprott Gold Miners ETF in lieu of the Market Vectors Gold Miners ETF.
Disclosure: Ben Kramer-Miller has no position in any of the stocks or funds mentioned in this article.