In the past I have written about the funds issued by Sprott Asset Management -- a subsidiary of Sprott Inc. (OTCPK:SPOXF) -- and I have given reasons that investors should choose these funds over their more liquid and popular alternatives.
- On November 12th I compared the Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP) to the physical platinum and palladium trusts offered by ETF Securities (NASDAQ:PLTM) and (NYSEARCA:PALL).
- On November 25th I compared the Sprott Physical Silver Trust (NYSEARCA:PSLV) to the popular iShares Silver Trust (NYSEARCA:SLV).
- The following day I compared the Sprott Physical Gold Trust (NYSEARCA:PHYS) to the very popular SPDR Gold Trust (NYSEARCA:GLD).
These articles mirrored one another in that I point out the Sprott funds' favorable tax treatment, the potential for investors to exchange their shares for physical metal, their favorable expense ratios, and the fact that their prospectuses were far clearer regarding the location of shareholders' bullion. I concluded by saying that investors would be wise to sacrifice the liquidity of the more common funds (and in some cases their relative discount) for the qualities just mentioned.
Speaking more generally what I like about the Sprott funds is that they are geared towards precious metals and commodity investors rather than investors who just want exposure. In fact elsewhere I argued that as the precious metals bull market resumed that Sprott's approach to precious metals investing would give it a distinct advantage over its peers, and that the money manager itself offered a compelling investment opportunity.
Recently Sprott released a new fund that confirms my belief that Sprott's management is attempting to compete in a saturated market by appealing to gold investors rather than investors who want gold exposure. This fund is the Sprott Gold Miners ETF (NYSEARCA:SGDM).
In short, the goal of the SGDM is to offer gold miner exposure. But rather than blindly mimicking an index that market-cap weights its components -- as is the case for the more popular Market Vectors Gold Miners ETF (NYSEARCA:GDX) -- the Sprott fund mimics an index that looks at companies' individual financial metrics in order to overweight stocks of companies that have favorable investment characteristics such as low debt, and low production costs.
If you look at the fund's home page, you will see the following:
Sprott Gold Miners Exchange Traded Fund seeks to deliver exposure to the Sprott Zacks Gold Miners Index (NYSE: ZAXSGDM). The Index aims to track the performance of large- to mid-capitalization gold companies whose stocks are listed on major U.S. exchanges.Why Sprott Zacks Gold Miners Index?
- The Index seeks to outperform a purely passive representation of the gold and silver mining industry
- Transparent, rules-based methodology designed to overweight gold stocks with attractive investment merits relative to the other stocks in the index
- Weighting methodology 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
- The stock selection and index weighting criteria were co-developed by Sprott Asset Management, a leading, long-time gold sector investor, and Zacks Index Services
- Quarterly rebalancing seeks to ensure that the latest company results are reflected in the composition and weighting of the index
Unlike your typical market-cap weighted ETFs, this strategy shows a clear slant towards investors looking to invest in gold miners long-term as opposed to traders. A brief look at the companies that are most heavily represented by the SGDM shows that this fund is the way to go for investors looking for the qualities that I highlight above. It also reveals a list of companies that have performed incredibly well as opposed to the GDX, which, as I've pointed out elsewhere, is filled with companies that have a lot of risk, debt, and histories of mismanagement and underperformance.
Here are SGDM's holdings.
|RANDGOLD RESOURCES LTD-ADR||(NASDAQ:GOLD)||15.57%|
|ELDORADO GOLD CORP||(NYSE:EGO)||5.42%|
|ROYAL GOLD INC||(NASDAQ:RGLD)||4.88%|
|SILVER WHEATON CORP||(NYSE:SLW)||4.88%|
|AGNICO EAGLE MINES LTD||(NYSE:AEM)||4.71%|
|BARRICK GOLD CORP||(NYSE:ABX)||4.31%|
|NEW GOLD INC||(NYSEMKT:NGD)||3.36%|
|YAMANA GOLD INC||(NYSE:AUY)||3.33%|
|KINROSS GOLD CORP||(NYSE:KGC)||2.48%|
|FIRST MAJESTIC SILVER CORP||(NYSE:AG)||2.11%|
|ENDEAVOUR SILVER CORP||(NYSE:EXK)||1.92%|
|SIBANYE GOLD- SPON ADR||(NYSE:SBGL)||1.90%|
|MCEWEN MINING INC||(NYSE:MUX)||1.87%|
|GOLD FIELDS LTD-SPONS ADR||(NYSE:GFI)||1.71%|
|PRIMERO MINING CORP||(NYSE:PPP)||1.54%|
|SANDSTORM GOLD LTD||(NYSEMKT:SAND)||1.50%|
|ALAMOS GOLD INC||(NYSE:AGI)||1.33%|
|SILVER STANDARD RESOURCES||(NASDAQ:SSRI)||1.02%|
|NOVAGOLD RESOURCES INC||(NYSEMKT:NG)||0.52%|
|AURICO GOLD INC||(NYSE:AUQ)||0.52%|
|COEUR MINING INC||(NYSE:CDE)||0.44%|
|DREYFUS TREAS PRIME CASH MGMT/INST||0.01%|
This fund contains many stocks that I have criticized either in my GDX article or elsewhere given their high debt, high costs, lack of growth, or high geopolitical risk. However they are all underweighted. On the other hand, the most heavily weighted stocks are all low cost producers or royalty/streaming companies, and they are growing. Let's look at a couple of examples.
1. The Royalty/Streaming Companies
The three large gold and silver royalty and streaming companies -- Franco Nevada, Silver Wheaton, and Royal Gold are all heavily represented in this fund -- they comprise three of the top 6 holdings and more than a quarter of the entire fund despite the fact that they have relatively low market capitalizations with respect to Barrick Gold and Newmont Mining (NYSE:NEM) -- the two largest gold miners by ounces produced. Yet only one of these companies -- the former -- is represented -- and Barrick only comprises 4.3% of the fund.
Why emphasize the royalty companies?
This is a topic that I have covered elsewhere, but essentially these companies all have low fixed costs due to the nature of their business model. This gives them the capital they need in order to grow by acquiring more royalties and streams. Thus it should come as no surprise that all three major gold and silver royalty and streaming companies have outperformed the metals, the miners, and the broader stock market over the last few years. Therefore the decision to overweight these stocks is a no brainer.
2. Low Cost Producers
Among the largest holdings--over 20% of the fund -- we have two of the lowest cost producers in the industry -- Randgold Resources and Eldorado Gold, both of which have had little trouble turning a profit during the downturn. This can hardly be said for the majority of the industry. As a result, these companies have remained profitable (although Eldorado Gold did take a write-down in Q4). These companies also have strong growth, very little debt, and they have outperformed the GDX over the past couple of years.
The Bottom Line
No ETF is perfect and there will undoubtedly be issues with some of the Sprott Gold Miners ETF holdings. But its emphasis on companies with desirable investment qualities make it a preferable fund for gold bulls who don't have the time to pick individual companies.
Despite its size -- just 1.2 million shares outstanding at $25/share -- it has already generated investor interest with daily volume in the tens of thousands of shares. This is, of course, not nearly as liquid as the GDX, but for most retail investors, this should be enough liquidity should you need to exit your position on short notice.
Finally, while GDX has a lower expense ratio the difference is minimal (0.57% for SGDM vs. 0.53% for GDX).
So while it has drawbacks, they are relatively insignificant for retail investors, while at the same time they are more than offset by Sprott's investor-friendly stock selection process. Thus investors looking for a gold miner ETF are encouraged to opt for this one over the GDX.
Disclosure: The author is long SLW, RGLD.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.