On the recent webcast, Is Now the Time to Consider a Different Kind of Gold ETF?, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, pointed out that gold has been an outperforming asset, even outpacing the S&P 500 index for more than a decade.
When looking for gold exposure, a number of people have turned to gold stocks. With more looking toward the benefits of factor-based smart beta strategies, gold miner investors can also consider a smart beta gold producer play as well.
For instance, unlike the other gold metal miners-related ETFs on the market, the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEArca: GOAU) is a smart beta offering that tracks a specialized or rules-based index to help hone in on quality players in the gold mining space. The underlying U.S. Global GO GOLD and Precious Metal Miners Index uses quantitative analysis to pick stocks, with a particular focus on royalty companies, which Holmes argued are better allocators of capital.
The underlying U.S. Global GO GOLD and Precious Metal Miners Index starts off with an overweight 10% tilt toward the top three precious metal miner companies in North America, followed by a 4% position in five highest-scoring companies around the world, a 3% weight in the next 10 highest scoring companies around the world and 2% in the next 10% highest-scoring companies outside North America.
The resulting portfolio includes 30% in the largest companies that are also categorized as royalty companies, followed by 20% mid-caps and 50% small-caps.
The royalty companies serve as specialized financiers that provide upfront capital to help fund producers’ exploration and new projects. The companies also receive royalties on what is produced or rights to a stream of precious metals at a fixed, lower-than-market price.
“The royalty allocations help investors gain exposure to the gold sector while potentially minimizing some risks associated with the industry,” Holmes said.
Related: New U.S. Global Investors Gold Miners ETF Enters Smart Beta Space
Holmes argued that royalty companies are superior in the gold mining space due to their more stable revenue and cash flow, high revenue per employee, rising book value per share and low Selling, General and Administrative costs to revenue.
Over the past five-year period ended June 30, royalty companies have seen dividends grow at a faster rate than the S&P 500, the broad S&P/TSX Global Gold Index and Philadelphia Stock Exchange Gold and Silver Index. Royalty gold mining companies have outperformed gold over the past year, generated greater revenue per employee than other producers and incurred less debt than their competitors.
Financial advisors who are interested in learning more about the gold mining industry can watch the webcast here on demand.