Mining ETFs: Eight Ways To Play
Wed, Aug 25, 8:46 AM ET, by Michael Johnston
Commodities have been one of the hottest corners of the ETF market, exploding on to the scene in recent years as investors have rushed to gain access to a suddenly democratized asset class that has been shown to add valuable diversification benefits to traditional stock-and-bond portfolios [see Rethinking Commodity ETFs]. But some investors have been frustrated by the nuances of the futures-based investment strategies implemented by commodity ETFs, watching stiff headwinds in the form of contangoed markets erode returns. That has led some to take another approach to establishing commodity exposure: investing in equities of companies engaged in the discovery and extraction of the resources. This strategy is nothing new–investors have been betting on oil prices through Exxon for decades–but the rise of the ETF industry has made it easy to establish diversified exposure to a group of companies whose operations revolve around a particular commodity [see What Every Investor Should Know About Commodity ETF Investing].  For investors looking to gain exposure to metals prices–both precious and industrial–there are a number of ETF options out there. Below, we highlight eight very unique types of mining ETFs [for more ETF insights, sign up for our free ETF newsletter]:
Staying Stateside: SPDR S&P Metals & Mining ETF (XME)This ETF seeks to replicate the S&P Metals & Mining Select Industry Index, a benchmark that consists of mining companies listed on the NYSE, American Stock Exchange, and NASDAQ. As such, XME is the only ETF on this list whose holdings consist entirely of U.S. stocks. XME is also the only mining ETF linked to an equal-weighted index; each of the 25 or so holdings account for an approximately equal percentage of total assets. Among the holdings of XME are Newmont Mining, Peabody Energy, and Coeur D’Alene Mines. BRIC & Beyond: Emerging Markets Metals & Mining Index Fund (EMT)This ETF from EGShares seeks to replicate the performance of the Dow Jones Emerging Markets Metals & Mining Titans Index. That benchmark consists of the largest publicly-traded mining companies involved in industrial and precious metals exploration, extraction and production within the emerging world. As such, EMT’s performance will depend more on demand for raw materials in the developing world. From a country perspective, EMT is heavy in Brazil, South Africa, China, and Russia, although it also includes exposure to India, Mexico, Indonesia, Poland, and Turkey. Gold Standard: Market Vectors Gold Miners ETF (GDX)For investors seeking out a creative way to establish exposure to gold, GDX has been a popular option. This ETF invests not in bars of bullion, but in the stocks of companies that are engaged in the extraction of the precious metal from the ground. Since the profitability of these companies depends on the prevailing market price for gold, GDX often trades as a leveraged play on gold prices. Riskier Alternative: Market Vectors Junior Gold Miners ETF (GDXJ)This ETF seeks to replicate the Market Vectors Junior Gold Miners Index, a benchmark that consists of small cap and mid cap companies engaged in the development of new sources of gold either through greenfields exploration or the use of new geologic models to prospect for gold in overlooked or abandoned properties. Given this focus, it’s not surprising that GDXJ is a more volatile, higher risk option for exposure to gold miners. Similar to GDX, this ETF often trades as a leveraged play on gold, exhibiting more volatility than the spot commodity price. Playing The Other Precious Metal: Silver Miners ETF (SIL)SIL is a relatively new ETF, but has already garnered a tremendous amount of interest from investors. This ETF seeks to replicate the Solactive Global Silver Miners Index, a benchmark that is made up of stocks of global companies engaged in silver mining. Silver has appeal as a safe haven due to its status as a precious metal, but is also used widely in numerous industrial applications [see New Silver Miners ETF Comes Flying Out Of The Gate]. Base Metals: Copper Miner ETFs (COPX, CU)For investors looking to establish exposure to companies whose fortunes tend to rise and fall along with copper prices, there is no shortage of options. There are currently two ETFs focusing on stocks of companies engaged in extraction of the industrial metal, including the First Trust ISE Global Copper Index Fund (CU) and Global X Copper Miners ETF (COPX). Despite the similar names, these ETFs are quite different; CU includes several diversified mining firms such as Rio Tinto and Xstrata while COPX is more of a “pure play” on companies who focus on copper. Going Platinum: Global X Platinum Index Fund (PLTM)Highlighting the granularity of the ETF product lineup, PLTM offers investors a way to invest in companies who are involved in mining platinum, one of the earth’s rarest metals. Platinum is used widely in the automotive industry–it’s a key component of catalytic converters–so this ETF’s fate is tied to that of Detroit. PLTM seeks to replicate the ISE Global Platinum Index, a benchmark designed to track public companies that are active in platinum group metals (PGMs). In addition to platinum, PGMs include palladium, osmium, iridium, ruthenium and rhodium. Last but not least are ETFs focusing on the global coal industry, which can include both mining companies and firms engaged in generating power from the “black gold.” There are two primary coal ETFs available, including the PowerShares Global Coal Portfolio and the Market Vectors Coal ETF (KOL). Both of these ETFs spread their exposure between U.S. and international equities, and the prices of both are generally tied to the global demand for coal. Disclosure: No positions at time of writing.
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