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(Kitco News) - Gold-mining stocks overall have been beaten up this year, but that hasn’t stopped investors putting in money, with a junior-mining exchange-trade fund seeing stout inflows.

These stocks’ performance improved a bit with the rally in gold prices, but for the most part they remain down on the year, except for one.
There are five main gold-mining ETFs, with the biggest by assets under management being the Market Vectors Gold Miners ETF (GDX). It’s also the only one that is up on the year, having gained 1.8% year-to-date as of Monday. The main ETF that focuses on junior miners is the Market Vectors Junior Gold Miners ETF (GDXJ) and it’s down 2.55% on the year.

When gold prices rallied in the late summer into early fall, the gold-mining stock ETFs outperformed the gold price, but when gold prices fell, the miner ETFs underperformed, said Christian Magoon,  chief executive officer of Magoon Capital, who tracks performance of ETFs, particularly gold ETFs. He is the former president of Claymore Securities, which is now owned by Guggenheim Investments.

Magoon noted even though the juniors-based ETF is lagging the main ETF in performance, it’s seen strong inflows.

Year-to-date, the Junior Miners ETF saw inflows of $1.1 billion in assets as of Monday, while the Gold Miners ETF saw inflows of $772 million, he said. Not only has the junior-miners fund seen more total inflows, the percentage gain is much greater when considering the ETF has $3.1 billion in assets under management versus the gold-miners fund’s total assets of $9.8 billion.

That says to him that these investors think the junior-miners will benefit more from the rise in gold prices than the senior miners, Magoon said. It’s a more volatile fund simply because the sector is more volatile, he said, and these investors might be seeking to make a leveraged play on higher gold prices.

He also noted the junior-miner ETF has seen no redemptions, or money withdrawn, since July 12 when $17 million came out. What’s also interesting is that since Oct. 2, the fund has been stable, with no inflows or outflows.

“Since we’ve seen no redemptions, people are staying put. It might just be balanced right now. It might be just a lull until after the elections,” he said.


This could be the case for ETF investors in general, who might take a cautious approach for the next few weeks. Given the coming U.S. presidential election and the uncertainty tied to that, along with the seasonal tendency for gold prices to perform poorly in October, it wouldn’t surprise him to see little action.

Looking at the physically backed gold ETFs, he said the recent outflows in the physically backed gold ETFs after strong inflows in anticipation and confirmation of a third round of quantitative easing is likely profit-taking following the price rally. Like other market watchers have said, a spate of better-than-expected U.S. economic news also may have spurred selling.

The investor who buys a physically backed gold ETF is more likely to be a buy-and-hold investor, while someone who buys the gold stock ETFs are more likely to turn over that fund quicker, he said.

Magoon noted that the iShares COMEX Gold Trust (IAU) is picking up more assets and has consistently been outperforming the biggest of the physically backed gold ETFs, State Street Advisors’ SPDR Gold Trust (GLD).

Year-to-date the iShares ETF has seen inflows of $1.9 billion, with about $11.6 billion under management, while the SPDR Gold Trust has seen inflows of $4.7 billion year-to-date, with about $75 billion under management, he said.

He attributes the growth in the iShare’s product to its cut in fees a few years ago. The iShares product has a smaller per-share size than the SPDR Gold Trust, and the iShare’s expense ratio is 0.25% versus the SPDR Gold Trust at 0.40%.

“Percentage-wise it’s almost at 35% cost savings on the fees,” he said.

Performance-wise, the iShares has bested the SPDR Gold Trust each year for the past five years by a small margin. Part of that success is fees, he said, but since the cut in fees only occurred about two years ago, he said something else is behind it. Over the past five years, the iShares ETF has returned 117.38% while the SPDR Gold Trust has returned 116.69%.

“Granted, 70 basis points is not a lot in five years. It could be something as simple as the expenses born by the trust and aren’t included in the expense ratio,” Magoon said.

Still, for someone looking to buy a physically backed gold ETF, the iShares looks attractive, he said. “It’s hard to justify (buying the SPDR Gold Trust) when the performance is more favorable and fees lower,” he said.

Magoon said that he wouldn’t be surprised if large investment houses like Vanguard or Charles Schwab would try and enter the ETF space with a physically backed fund of their own. There’s nothing being discussed on that front, but Magoon said it’s natural that these firms would want to get a piece of the $90 billion-plus gold ETF market.

These firms can look at their customer accounts to see how popular these funds are and might want to try and bring some of that money home. Vanguard is known as a low-cost fund provider and Magoon suggested that perhaps one way these firms could compete is by offering commission-free trades, which isn’t offered now.

chart courtesy of Magoon Capital

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By Debbie Carlson of Kitco News dcarlson@kitco.com

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