Barchart.com ETF Research

ETF Research written by the Barchart.com ETF Research Team

Last Updated: December 31, 2010

Table of Contents

1. Introduction
2. Broad Metals & Mining ETFs
3. Precious Metals Mining ETFs
4. Gold Mining ETFs
5. Silver Mining ETFs
6. Platinum ETFs
7. Copper Mining ETFs
8. Steel ETFs
9. Lithium, Rare Earth Metals & Uranium ETFs
10. "Best in Class" Investment Conclusions

Introduction

This report analyzes exchange-traded funds (ETFs) that track the stocks of companies that are in the business of extracting and/or processing metals, coal and other materials from the earth. "Metals and mining" stocks are also included in ETFs that specialize in the materials sector, but materials ETFs also have a heavy concentration on chemicals and other sectors. This report selects the "Best in Class" ETFs in just the metals and mining industry.

Broad Metals & Mining ETFs

SPDR S&P Metals & Mining ETF (XME) (issuer web site link) – This ETF, launched in June 2006, currently has $1.2 billion in assets under management. This ETF tracks the S&P Metals and Mining Select Industry Index, which is an equal-weighted index that represents the metals and mining sub-industry portion of the S&P Total Market Index. Since the index is equal-weighted, all of the components have a weight near 4%. The index currently holds 26 U.S.-listed stocks with an average market cap of a hefty $8.6 billion. From an industry classification standpoint, the fund currently places a 22% weight on energy companies and a 78% weight on materials companies. The fund holds seven coal companies with a combined weight of 26% in the fund, with coal stocks including Arch Coal, Massey, Peabody, and others. The other 19 companies in the index are metal and metal mining companies involved in such metals as steel (e.g., AK Steel, US Steel), titanium (Titanium Metals Corp), aluminum (Alcoa, Century Alum), copper (Freeport-McMoRan), gold & silver (Newmont, Royal Gold, Coeur D Alene Mines), platinum and palladium (Stillwater Mining), and others. The fund has a low expense fee of 0.35%.

Emerging Global Shares Dow Jones Emerging Markets Metals & Mining Titans Index (EMT) (web site link) – This fund, launched in May 2009, has only $28 million in assets under management. This fund is market-cap weighted and holds 24 stocks in the metals and mining industry (not coal) that focus their operations on the emerging world. This fund has an expense fee of 0.85%. While we like the theme of investing in metals and mining companies in emerging countries, this fund has yet to attract enough assets under management to assure liquidity and longevity.

Thomson Reuters / Jefferies  CRB Global Industrial Metals Equity Index Fund (CRBI) (web site link) – This fund, launched in October 2009, has only $5 million in assets under management and we therefore do not recommend consideration of this product at this time. This fund tracks the "Thomson Reuters/Jefferies CRB In-The-Ground Global Industrial Metals Equity Index," which holds 34 global stocks in the metals and mining industry. The fund has an expense ratio of 0.65%.

Precious Metals Mining ETFs

PowerShares Global Gold and Precious Metals Portfolio (PSAU) (web site link) – This fund, launched in September 2008, has $67 million in assets under management. This fund tracks the "NASDAQ OMX Global Gold and Precious Metals Index.SM" This market-cap weighted fund holds the stocks of 68 companies that are involved in precious metals mining, including gold, silver and platinum. The largest country allocations are Canada at 45%, South Africa at 20%, the U.S. at 11%, and Australia at 9%.  The five largest holdings are Goldcorp (7.87%), Newmont Mining (7.76%), Barrick Gold (7.74%), Newcrest Mining (7.44%), and Anglo Platinum (6.32%). This fund has an expense fee of 0.75%.

Gold Mining ETFs

Market Vectors Gold Miners ETF (GDX) (web site link) – This fund, launched in May 2006, has a very large $7.3 billion in assets under management. The fund holds 31 U.S.-listed gold mining stocks. The five largest holdings are Barrick Gold (16.76% weight), Goldcorp (10.66%), Newmont Mining (9.67%), Kinross Gold (6.80%), and AngloGold Ashanti (6.00%). The fund holds mostly large-cap stocks with 85% of the stocks having a market cap of more than $5 billion. This fund has a net expense fee of 0.53%. As Figure 1 illustrates, GDX has substantially outperformed the SPDR S&P Metals & Mining ETF (XME) since January 2008, although since July 2010 the roles have been reversed and XME has done much better than GDX.

Figure 1 – Market Vectors Gold Miners ETF (GDX) versus SPDR S&P Metals & Mining ETF (XME) (live chart link)

Market Vectors Junior Gold Miners Fund (GDXJ) (web site link) – This fund, launched in November 2009, has a large $2 billion in assets under management. The fund holds small-cap gold mining stocks with an average market cap of $850 million. The idea of the fund is to focus on smaller gold mining companies that are in the exploratory or early development phase, giving them higher risk but the potential for higher growth and a possible acquisition at a premium by a larger mining company. This fund holds junior global gold mining stocks listed in the U.S., Canada, Australia, China, South Africa and the U.K. The five largest holdings are Hecla Mining (4.88%), Coeur d’Alene Mines (4.25%), Allied Nevada Gold (3.80%), Silver Standard Resources (3.78%), and Alamos Gold (3.73%). The fund has an expense fee of 0.59%. As Figure 2 illustrates, this Junior Gold Miners Fund (GDXJ) has substantially outperformed its large-cap sister fund Market Vectors Gold Miners ETF (GDX).

Figure 2: Market Vectors Gold Miners ETF (GDX) vs Market Vectors Junior Gold Miners Fund (GDXJ) (live chart link)

Global X Gold Explorers ETF (GLDX) (web site link) – This fund, which was just launched in November 2010, currently has $23 million in assets under management. This fund tracks the Solactive Global Gold Explorers Index, which is an index of 30 global companies that are active in the exploration for gold. This fund has an expense fee of 0.65%. This fund tracks an interesting sub-set of gold mining companies but does not have high enough assets under management at this time for a recommendation.

 

Silver Mining ETFs

Global X Silver Miners ETF (SIL) (web site link) – This fund, launched in April 2010, has been very successful in gathering assets and currently has $330 million in assets under management. This is the only ETF that is currently available that focuses exclusively on silver mining companies. This fund tracks the Solactive Global Silver Miners Index. This fund holds 25 global stocks, with the top five holdings including Silver Wheaton (14.77% weight), Fresnillo (14.5%), Pan American Silver Corp (11.24), Industrias Penoles Sav De Cv (10.68), and Hochschild Mining (5.19%). This fund has an expense fee of 0.65%.

Platinum ETFs

First Trust ISE Global Platinum Index (LTM) (web site link) – This fund, launched in March 2010, has only $30 million in assets under management. The fund holds 25 platinum mining company stocks. The top five holdings are Northam Platinum (7.09%), Anglo Platinum (6.95%), Impala Platinum (6.94%), Johnson Matthey (6.90%), and Lonmin (6.84%). The top five countries represented in the fund are South Africa at 32.52%, Canada at 18.47%, U.K. at 13.72%, Australia at 10.16%, and Russia at 6.74%. The fund has an expense fee of 0.70%.

Copper Mining ETFs

First Trust ISE Global Copper Index (CU) (web site link) – This fund, recently launched in March 2010, has $90 million in assets under management. The fund currently holds 30 global copper mining company stocks.   According to the fund literature, the index uses a "modified linear weighted methodology adjusted by revenue exposure to copper production, where component securities are grouped into linearly weighted quartiles and then equally weighted within each quartile. The resulting distribution allows smaller, more copper-focused companies to be adequately represented in the index." The top five countries represented by the fund are Canada with a weight at 35.03%, U.K. at 21.50%, U.S. at 11.12%, Australia at 7.27%, and Switzerland at 5.63%. The top five holdings are Antofagasta (5.82%), Freeport-McMoRan Copper & Gold (5.78%), Southern Copper (5.74%), Xstrata (5.64%), and Sociedad Minera Cerror Verde (5.54%). The fund has an expense fee of 0.70%.

Global X Copper Miners (COPX) (web site link) – This fund, launched in April 2010, currently has $81 million in assets under management. The fund holds 35 global copper mining stocks and is based on the Solactive Global Copper Miners Index. The index is weighted with a free-float market cap scheme, with a maximum weight for a component at rebalancing of 4.75%. The largest holdings are Inmet Mining Corp (with a weight of 5.26%), Freeport McMoRan Copper & Gold (5.15%), First Quantum Minerals (5.01%), Grupo Mexico (5.00%), and KGHM Plska Miedz (4.94%). This fund has an expense fee of 0.65%.

Figure 3: First Trust ISE Global Copper Index (CU) versus Global X Copper Miners (COPX) (live chart link)

Steel ETFs

Market Vectors Steel ETF (SLX) (web site link) – This fund, launched in October 2006, has $286 million in assets under management. This fund holds 27 stocks of U.S.-listed companies that are predominantly involved in the production of steel products or mining and processing of iron ore. The top five holdings are Rio Tinto (12.40%), Vale (11.34%), ArcelorMittal (8.96%), POSCO (5.62%), and U.S. Steel (5.25%). The fund has a net expense fee of 0.56%.

SLX is the only real choice in the steel sector since the other ETF in the sector, PowerShares Global Steel Portfolio (PSTL) (web site link), has only $5 million in assets under management and cannot be considered as an investment option at this time.

 

Lithium, Rare Earth Metals & Uranium ETFs

Global X Lithium ETF (LIT) (web site link) – This fund, launched in July 2010, has gained fairly strong traction and currently has $132 million in assets under management. This fund holds 23 stocks of companies that are involved in the mining, processing and use of lithium for various battery applications. The fund has a heavy combined weight of 37% on the world’s two largest lithium mining companies: Soc Quimica y Minera (20.14%) and FMC Corp (16.75%). The fund then spreads out the rest of the weights among a mix of other lithium mining companies and also battery companies such as A123 Systems (5.49% weight), Exide Technologies (4.96%), Saft Groupe (4.93%), GS Yuasa Corp (4.48%), Sanyo Electric (4.30%), and others. The vertical integration of the holdings list means this fund is not exclusively a metals/mining fund and could just as easily be considered a battery fund. The fund has an expense fee of 0.75%.

Market Vectors Rare Earth/Strategic Metals ETF (REMX) (web site link) – This fund, launched in October 2010, has gained strong traction and currently has $163 million in assets under management. The fund holds 24 global stocks of companies involved in the business of extracting rare earth metals, which are critical in various high-techology products. The top five holdings are Lynas (8.82%), Iluka Resources (8.19%), Thompson Creek Metals (6.82%), Molycorp (6.30%), and Titanium Metals (5.55%). The fund has a net expense fee of 0.57%.

Global X Uranium ETF (URA) (web site link) – This fund, launched in November 2010, has received fairly strong traction and currently has $136 million in assets under management. The fund holds 23 global stocks of companies in the uranium mining business. The top five holdings are: Cameco Corp (18.7% weight), Uranium One (12.70%), Paladin Resources (11.25%), Denison Mines (5.75%), and Uranium Energy Corp (5.25%). This fund has an expense fee of 0.69%.

 

"Best in Class" Investment Conclusions

Our ideal ETF in this sector is an ETF that holds globally-listed stocks of companies that are only in the metals industry and are not in the coal industry. The closest ETF to that description is the Thomson Reuters / Jefferies CRB Global Industrial Metals Equity Index Fund (CRBI). However, that fund has not received any traction as yet and has only $5 million under management, which means we cannot recommend investing in this product at this time.

The SPDR S&P Metals & Mining ETF (XME) is the largest ETF of the broad metals and mining ETFs with $1.2 billion under management. We are choosing this for our "Best in Class" ETF for the broad metals and mining sector. However, we need to note three caveats with the fund. First, the fund holds only U.S.-listed stocks, which means it doesn’t have the broad global exposure that we would prefer. Second, the fund holds only 26 stocks, which is barely enough diversification to be protected against company risk in any single stock. Third, the fund holds seven coal companies with an overall weight of 26% in the fund. An investor may be fine with that fairly large 26% coal exposure. But in our view, we would prefer to stick with only metals companies in the fund, which trade based on metals prices and the business cycle. Coal is a different business, being tied to energy and being under pressure globally due to pollution and greenhouse gas emission controls.

Given our caveats for XME, an investor has the alternative of instead investing in several of the other ETFs in the sector in order to more accurately pinpoint desired exposure. For example, instead of putting all the allocated funds for the sector into a single fund, an investor could spread the money around in several of the metal sub-sectors, such as gold, silver, platinum, copper, steel and some of the specialty areas.

In the gold sector, our "Best in Class" choice goes to the Market Vectors Gold Miners ETF (GDX) for large-cap gold companies and to the Market Vectors Junior Gold Miners Fund (GDSJ) for small-cap gold companies. Both of these ETFs have a large amount of assets under management, although the attractiveness of GDX is diminished by the fact that it holds only U.S.-listed stocks.

In the silver sector, the Global X Silver Miners ETF (SIL) is the only silver ETF but we like the product since it has global exposure and a high level of $330 million in assets under management. In the platinum sector, First Trust ISE Global Platinum Index (LTM) is the only ETF. Since it has only $30 million in assets under management, we cannot recommend the ETF at this time. In the steel sector, Market Vectors Steel ETF (SLX) is the only ETF with sufficient assets under management and is an acceptable choice as long as investors recognize that it holds only U.S.-listed stocks and has limited global exposure.

In the copper sector, the First Trust ISE Global Copper Index (CU) and Global X Copper Miners (COPX) funds are fairly similar with a large overlap of stock holdings. The fund performance has been similar as well, as seen in Figure 3. However, we chose the Trust ISE Global Copper Index (CU) as the "Best in Class" because it has higher assets under management and because First Trust is a much more established ETF issuer than Global X. We also like the weighting scheme of CU, which provides a more evenly weighted index and gives smaller-cap stocks a higher weighting than COPX.

We like each of the ETFs in the lithium, rare earth metals, and uranium space: Global X Lithium ETF (LIT), Market Vectors Rare Earth/Strategic Metals ETF (REMX), and Global X Uranium ETF (URA). All three of the ETFs have sufficient assets under management of more than $100 million. We view all three of these sectors as having attractive long-term growth stories.

 

From the Barchart.com ETF Research Team
Last Updated: December 31, 2010

ETP's mentioned: XME, EMT, CRBI, PSAU, GDX, GDXJ, GLDX, SIL, LTM, CU, COPX, SLX, PSTL, LIT, REMX, URA.

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