With gold prices back to one-month highs, investors may consider alternative index-based gold miner ETFs to capitalize on the strengthening bullion.
The Sprott Gold Miners ETF (NYSEArca: SGDM) has increased 77.6% year-to-date while the Sprott Junior Gold Miners ETF (NYSEArca: SGDJ) advanced 110.1%.
Unlike traditional market cap-weighted funds, SGDM and SGDJ follow a factor-based or smart-beta indexing methodology that can potentially enhance returns.
Specifically, SGDM follows mid- to large-cap gold miners but the underlying index weights components based on quarterly revenue growth on a year-over-year basis and the quality of its balance sheet as measured by long-term debt to equity.
By focusing on balance sheet strength, the fund has greater exposure to companies with lower long-term debt to equity ratio, which have a greater ability to weather potential downturns.
The underlying index provides a “Transparent, rules-based methodology designed to overweight gold stocks with attractive investment merits relative to the other stocks in the index,” according to Sprott.
Additionally, SGDJ tracks small-cap gold miners but weighs its components based on revenue growth and price momentum.
[related_stories]Unlike SGDM, SDGJ focuses on price momentum, which helps identify leading junior gold miners driven by factors like new discovery, mine development or joint ventures.
“The factor-based Index methodology seeks to emphasize companies with the strongest relative revenue growth and price momentum, two factors that historically have been strong predictors of long-term stock performance for junior gold miners,” according to Sprott.
Given their focus on revenue growth and high beta stocks, the two factor-based gold miner ETFs may be seen as growth-oriented, betting on high-flying companies that could fly even higher.
Gold miners are strengthening on rising gold prices, with gold for December delivery rising up to $1,308.2 per ounce, its highest level since October 4.
While concerns over a Federal Reserve interest rate hike have diminished the appeal for precious metals, renewed political risk on an improved outlook for a Donald Trump presidency have supported safe-haven plays.
“Politics are going to keep the market uneasy enough that there will not be aggressive selling in gold,” Peter Hug, global trading director at Kitco Metals, told the Wall Street Journal “Investors have redeployed capital into gold just in case there is a surprise Tuesday night.”
For more information on the gold market, visit our gold category.
Sprott Gold Miners ETF