GDX and GLD
The VanEck Vectors Gold Miners ETF (GDX) tracks the performance of NYSE (New York Stock Exchange) ARCA Gold Miners Index. Its holdings mainly consist of senior and intermediate precious metal miners listed in the US and Canada. Barrick Gold (ABX), Newmont Mining (NEM), and Goldcorp (GG) are the three largest holdings of the ETF, contributing 9%, 8%, and 6.7%, respectively, of the fund’s holdings.
GDX has given a return of 60% YTD (year-to-date) as of April 25, 2016, which is four times the return generated by the SPDR Gold Shares (GLD) in the same time period. GLD is the largest physically backed gold ETF that tracks the performance of physical gold.
Divergence between GDX and GLD
Investors should not be surprised by the recent divergence in performances of GDX and GLD. While GLD tracks physical gold prices, similar to gold equities, GDX is a leveraged play on gold prices. Depending on the holdings at any particular time, then, the operational and financial leverage of those holdings have a great bearing on the performance of GDX.
Leverage at play
During times of high and increasing gold prices, leveraged ETFs and equities usually outperform the underlying commodity. But this works the other way round as well. The Direxion Daily Gold Miners Bull 3x leveraged ETF (NUGT), for example, has returned a whopping 203% YTD, while the Direxion Daily Gold Miners Bear 3x leveraged ETF (DUST) has returned -86% in the same time period. (To read more about gold’s recent direction, check out the series Must Know: Where Are Gold Prices Headed Next?)
It’s important to note, however, that these leveraged ETFs provide greater returns during an upward move. And there are considerable risks associated with investing in precious metals using leveraged ETFs, so investors should tread cautiously when using leverage.