Miner ETFs Can Provide Greater Stability For An Entire Portfolio

Sep. 6.11 | About: VanEck Vectors (GDX)

We’re all guilty of “it.” We shy away from more volatile stock assets during bouts of extreme market unrest.

Indeed, it may seem prudent to wait for the CBOE Volatility Index (VIX) to drop below 30. In fact, with the exception of picking up the occasional “blood-in-the-street” bargain, it is wise to maintain a lighter-than-normal allocation to stocks.

That said, every rule has a few exceptions. For instance, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) is 50% more volatile than the S&P 500. With the S&P 500 trading in daily range of 2%-4% over the past month, who wants to see his/her investment in metal miners bouncing 3%-6% throughout a session?

However, when we over-analyze the volatility of an individual holding, it can prevent us from recognizing the calming effect that a low-correlating/non-correlating asset has in a overall portfolio. Specifically, GDX has a negligible correlation (coefficient of 0.04) with the Dow Jones Industrials Trust (NYSEARCA:DIA) and a weak correlation (0.34) with the yellow metal via SPDR Gold (NYSEARCA:GLD).

In essence, investors who may worry too much about the ever-changing, intra-day movement of Market Vectors Gold Miners (GDX), may be missing an opportunity to reduce overall portfolio volatility; that is, when each of your respective holdings zigs and zags independently, the genuine diversification can lead to greater stability for your entire portfolio.

Below, I have highlighted the correlation coefficients for most of the Metal Miner ETFs:

Click to enlarge
Metals Miners ETFs: 1-Year Corr Coefficients With Stocks And With Gold
With Dow (DIA) With Gold (GLD)
Market Vectors Gold Miners (GDX) 0.04 0.34
SPDR S&P Metals & Mining (NYSEARCA:XME) 0.90 0.02
Market Vectors Junior Gold Miners (NYSEARCA:GDXJ) 0.28 0.01
Global X Silver Miners (NYSEARCA:SIL) 0.62 0.53
Global X Copper Miners (NYSEARCA:COPX) 0.80 -0.02
EGShares Emerging Market Metals/Mining (NYSEARCA:EMT) -0.25 -0.36
Click to enlarge

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.