Industry consolidation, lower interest rates and the weaker dollar are among the factors propelling gold miners and the related ETFs higher this year. The U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEArca: GOAU) is participating in that upside with a year-to-date gain of almost 11%.
GOAU, which is almost two years old, tracks the U.S. Global GO GOLD and Precious Metal Miners Index (GOAUX). The fund differs from traditional gold miners ETFs in that it “provides investors access to companies engaged in the production of precious metals either through active (mining or production) or passive (owning royalties or production streams) means,” according to U.S. Global.
While many traditional gold miners ETFs emphasize exposure to miners of bullion, GOAU’s exposure to royalty companies can potentially give investors a performance advantage.
“Royalty companies have historically outperformed all other categories of miners and the gold price from 2004 to 2018,” said U.S. Global CEO Frank Holmes. “Just look at the chart below using data from Paradigm Capital. They collectively delivered a 16 percent compound annual return, whereas the gold price saw a 10 percent return and both juniors and seniors were in the negative.”
Chart Courtesy: Paradigm Capital
An Intelligent Alternative
Unlike the other gold metal miners-related ETFs on the market, 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.
GOAU’s underlying index is comprised of U.S. and international companies that earned at least 50% of their aggregate revenue from precious metals and categorizes components into four “tiers” of precious metals companies based on certain fundamental factors.
Royalty and streaming companies “serve as specialized financiers that provide upfront capital to help fund producers’ exploration and production projects,” said Holmes. “In return, they receive royalties on whatever is produced or rights to a ‘stream.’ A stream is an agreed-upon amount of gold, silver or other precious metal at a fixed, lower-than-market price.”
Royalty and streaming exposure can help investors better manage many common risks associated with traditional producers, such as building and maintaining mines, among others. Moreover, the lower risk may help diminish risk since royalty companies have historically rewarded investors by increasing dividends at a faster clip than the broader equity market.
“Since they aren’t operating mines themselves, they aren’t responsible for huge infrastructure and operating costs,” adds Holmes. “Royalty companies also hold highly diversified portfolios of mines and other assets, helping to mitigate concentration risk in the event that one of the properties stops producing precious metals.”
For more information on the gold markets, visit our gold category.