A Pair of ETFs for Smart Beta Plays in Gold

A stronger-than-expected jobs report last week put a speed bump in front of accelerating gold prices and if investors want to get more strategic, they might want to consider a pair of exchange-traded funds (ETFs) that incorporate smart beta.

Per a CNBC report, with gold “having risen for the previous three sessions, spot gold was up 0.1% at $1,506.31 per ounce. Prices are still on track for a weekly gain of about 0.8%. U.S. job growth increased moderately in September, with the unemployment rate dropping to near a 50-year low of 3.5%, assuaging concerns the slowing economy was on the brink of a recession.”

The better-than-expected jobs report now puts gold in a bind where gains could now be dependent on the prospect of further rate cuts.

“There were expectations that we might see the worst jobs report and that did not happen. Gold is counting on the Fed cutting more interest rates,” said Jeffrey Sica, founder and CEO of Circle Squared Alternative Investments. “Considering how dismal the other economic numbers were, this jobs report was fairly acceptable. Yesterday, we saw a real strong sentiment towards the Fed lowering interest rates because of the economic weakness and this (jobs data) might have a reverse effect.”

With volatility in mind, investors may consider alternative index-based gold miner ETFs like the Sprott Gold Miners ETF (NYSEArca: SGDM) and Sprott Junior Gold Miners ETF (NYSEArca: SGDJ). 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. As such, 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.

Additionally, SGDJ tracks small-cap gold miners, but weighs its components based on revenue growth and price momentum. 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 Fed is still expected to cut at least once more this year, but the December meeting remains a toss-up. The economy is not falling off a cliff and gold could see some softness, but the overall bullish trend should remain intact,” said Edward Moya, a senior market analyst at OANDA.

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