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Summary Gold miners have carved their own niche with GDX being the largest ETF. However, GDX demonstrated unsatisfactory returns with high volatility levels over the last few years. Nonetheless, GDX is a great portfolio diversifier and deserves serious consideration once the uptrend resumes. Over the years gold miners have become an important part of the exchange traded funds (ETFs) universe. By far the largest fund in this segment is the Market Vectors Gold Miners ETF (NYSEARCA: GDX ), which currently holds $5.0 billion of assets under management. The fundamentals behind gold mining stocks are pretty well covered, thus in this article I would like to focus on their risk parameters. Factor analysis In terms of their performance, gold miners tend to live a life of their own. Over the last 5 years, GDX has lost 70% of its value, whilst the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) has gone up 91%. To understand the drivers of returns better, I have checked a basic version of factor analysis on the freely available investor’s resource InvestSpy . Utilizing 5 years of historical data, the results of an unconstrained regression are as follows: What the table above tells us is that from major asset classes gold has by a long way the biggest impact on GDX returns. Expressed in simple terms, an increase of 1% in the SPDR Gold Trust ETF (NYSEARCA: GLD ) pushes GDX up by 1.57% on average. Moves in broader stock and bond markets also have an effect on GDX but it is about 3 times smaller than that of gold. Meanwhile, changes in oil price and volatility levels do not appear to influence GDX performance. It is important to note that a combination of all these instruments explains about 60% of GDX returns as indicated by the R-squared reading. Therefore, there is still a substantial portion of gold miners’ returns that is dependent on other factors. Risk metrics I strongly believe that it is crucial to check risk parameters of every tradable security before investing into it. In the case of GDX, its performance over the last 5 years can be neatly summarized in this table: Source: InvestSpy The first thing that draws attention is the absolutely massive maximum drawdown of 80%, which reflects a woeful performance since 2012: (click to enlarge) Source: Google Finance Swings of such magnitude are typically associated with high volatility levels. And this is very true with GDX as its annualized volatility of 38.6% is more than two times higher than that of SPY. However, GDX has a relatively low beta coefficient of 0.62, which is to a large extent factored by a low correlation with SPY of only 0.24. This means that even though GDX is a volatile security, it tends to move independently from the broader stock market, just as outlined in the previous section of this article. Top 10 Holdings As the top 10 holdings of GDX account for 54% of net assets, it useful to take a closer look at them individually: Source: InvestSpy It turns out that they all demonstrate fairly similar risk characteristics. In terms of annualized volatility, the range is pretty narrow from 36% to 47%. Beta coefficients fluctuate from 0.4 to 0.6 with a couple of exceptions – Silver Wheaton Corp. (NYSE: SLW ), a pure silver mining business, moves more closely with the broader stock market than gold miners, whilst Newcrest Mining (NYSE: ASX ), the only non-U.S. listed corporation in the top 10, is naturally less dependent on the moves in the U.S. stock market. In contrast, the returns of the largest GDX holdings have been much more divergent over the last 5 years. Even though 7 out of 10 stocks experienced a drawdown of at least 70%, two companies – Franco-Nevada Corporation (NYSE: FNV ) and Royal Gold, Inc. (NASDAQ: RGLD ) – managed to post positive returns. This serves as a nice reminder of the diversification benefit that an investor enjoys by investing in an ETF rather than a single stock in the sector. Conclusion As illustrated in one of my earlier articles ” Seeking Diversification – Top 3 ETFs ,” a volatile but uncorrelated security tends to be a great diversifier in a portfolio. GDX has been underperforming for long time but once it turns the corner, this ETF will be the one you need to seriously consider for inclusion into your portfolio. Scalper1 News
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