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GDX, or the VanEck Vectors® Gold Miners, is an exchange-traded fund (ETF) that is traded on the NYSE Arca (New York Stock Exchange Archipelago Exchange). By definition, an ETF is an investment fund that holds a basket of individual stocks, commodities, bonds, or other investments. They are called ‘exchange traded’ simply because they can be traded on an exchange, much like stocks, indices, or other financial assets. The VanEck Vectors Gold Miners ETF (GDX) is a managed fund that is designed to provide investors with exposure to global gold mining companies. It seeks to replicate the yield and price performance of the NYSE Arca Gold Miners Index (GDMNTR), as closely as possible, before fees and expenses, and it tracks the overall performance of companies involved in the gold mining industry. GDX was launched in 2006, and as of October 2018, it has total assets of about $8 billion, making it the largest and most popular ETF in the gold mining sector. Since its establishment, GDX has rebalanced just once; a 2013 overhaul that saw the fund include non-US listed stocks. This effectively provided investors with international exposure to countries, such as the United Kingdom, Canada, South Africa and Australia.
Since the beginning, ETFs have provided investors with many benefits, including:
There are many ETFs available for trading, but not all of them will help you meet your trading goals. Choosing the right ETF to trade is just as important as the trading strategy you wish to implement.
Here is what to consider when choosing an ETF:
Based on the parameters outlined above, GDX is one of the best ETFs available to investors for trading online. GDX stands out in the materials industry, especially in the gold mining niche, where it is the largest and most liquid ETF. In terms of trading expenses, GDX charges 51bps (basis points), a tad higher than the average 40bp in the industry. But its high liquidity and the average daily turnover of about 40 million shares, makes these costs negligible. GDX’s investment objective is to match the price and yield of the NYSE Arca Gold Miners index. It acts as a leveraged play on the price of gold, making it ideal for investors seeking exposure to the global mining sector of this lucrative metal.
In its basket, GDX holds 51 stocks. Its largest holding is Newmont Mining, with a 9.8% share. No other firm holds more than 6.6% share. The fund is well distributed, with 16% going to large-cap companies, 46% to mid-cap companies, and 38% going to small-cap companies. Such distribution ensures GDX investors are broadly exposed to the entire gold mining space. But while having a broad asset basket has made the GDX the de-facto measure of gold stocks performance, it has also exposed the fund to over-diversification. Gold mining, being a high-risk industry, makes the fund vulnerable to underperforming companies that may drag the rest downwards. Still, the GDX has grown to become a solid ETF benchmark that offers investors lucrative opportunities in a popular sector.
As mentioned, the Market Vectors TR Gold Miners instrument, or the GDX, seeks to replicate the yield and price performance of the NYSE Arca Gold Miners Index, in order to track the overall performance of companies that are involved in the gold mining industry. The Net Asset Value (NAV) of a VanEck Vectors Exchange Traded Fund (ETF) is determined at the close of each business day. It represents the dollar (USD) value of one share of the fund. In order to calculate the GDX, you need to take the total assets of the fund, subtract the total liabilities, and divide this by the total number of outstanding shares. It is important to note that the NAV is not necessarily the same as the ETF ‘s intraday trading value. As a result, VanEck Vectors ETF investors should not expect to buy or sell shares at the net asset value.
Historically, GDX has always demonstrated a split personality. Due to its composition, investors can expect the fund to rise or fall proportionately in tandem with spot gold prices. But this has never always been the case. For instance, during the 2008-11 global financial crisis, gold prices increased by 150%, but the GDX recorded a 300% jump in the same period. This makes the fund a primarily speculative asset. The chief driver of the fund are the earnings from miners, and the largest variable influencing earnings is the price of gold. The logic is simple; gold miners have a fixed cost of extracting gold from the ground. The prevailing spot price of the yellow metal will determine the eventual profits the miner expects in the future. For instance, let’s say a miner has an extraction cost of £400 per ounce of gold and the current spot price is £500 per ounce. The expected return for the miner is £100 per ounce of gold that will be sold.
If gold prices increase by 20% to £600 per ounce of gold, the miner will now expect returns of $200 per ounce. A 20% increase in gold prices has earned the miner a 100% increase in expected returns. Therefore, to trade GDX effectively, it is essential to track the factors that affect the supply and demand dynamics of gold. One of the major factors is the US dollar (USD). Gold prices are usually pegged to the US dollar, so a rising greenback will impact the price of gold negatively, and vice versa. The biggest influencer on the value of the US dollar is the US Federal Reserve that determines the monetary policy direction of the United States. When the US Fed hikes interest rates, the US dollar value will increase, and thus suppress the gold price; and when interest rates are cut, the US dollar will perform poorly, but gold prices will tend to rise.
Gold has also been the primary hedge against inflation for many decades. Investors usually flock to gold in times of uncertainty and rising inflation, thus pushing prices higher. Uncertainty can arise from geopolitical concerns, such as wars, volatile elections and trade tensions; and gold has, over the years, proven to be a positive performer during such times. Ever since their growth in popularity, cryptocurrencies have also had some impact on gold prices. As decentralised digital currencies, cryptos have attracted investors who were previously attracted to gold as well. Investors have viewed cryptos as a hedge against inflation. Safety conscious investors, previously only considering gold, now have an added item on the trading menu. As such, rising cryptocurrency prices could impact gold prices negatively, while declining crypto prices could have a positive effect on the price of gold.
GDX has unique characteristics which makes it very lucrative to be traded as a CFD (Contract for Difference). As a fund composed of multiple stocks, it is prone to frequent volatility. When trading a CFD, the major advantage is that the investor does not own the underlying asset, and only speculates on its price movement. A volatile financial asset, such as the GDX, makes a perfect choice for CFD trading since profits are made from price movement. In contrast, traditional GDX investors only hope for gold prices to tick higher and stay that way for them to make a profit. CFD trading also allows for multidirectional trading, which means that investors have the chance to profit whether the fund is trending higher or lower. With leverage offered on CFD products as well, it also means that traders stand to enjoy amplified profits with limited capital outlay.
Trading GDX as a CFD (Contract for Difference) on the AvaTrade platform comes with the following advantages:
If you are interested in the performance of gold, and in particular the companies that mine and explore for gold, then the Market Vectors TR Gold Miners is a perfect investment choice for you. It is an easy way to make a diversified trade on the strength of the entire gold mining sector. And it can be very profitable too, because the gold mining stocks tend to be very volatile in their reaction to movements in the spot and futures gold markets. This volatility can present traders with some very good opportunities.
It’s important to understand that the Market Vectors TR Gold Miners is a fund that is based on gold miners’ shares, not on the price of gold. While the gold miners do typically move in lockstep with gold prices, there are other factors that can impact the gold mining shares. In terms of what’s best for speculating on movements in the gold miners, the Market Vectors TR Gold Miners is the best way to get a diversified exposure to the group. This can help smooth out price movements, making it easier for technical traders in particular.
There are many strategies that are successful for trading gold miner ETFs, and most of them are technical in nature. Price action can be quite predictable for this group since it tends to trend quite well. The first thing to do is determine the direction of the trend – up, down, or sideways. If the market is moving sideways you may want to find a channel for the prices and trade bounces from the high and low points of the channel, waiting for the eventual breakout move. In a market that’s trending higher look for a pullback followed by a sideways pause on a 1-minute chart. The pause should go on for several candles, and when price resumes a move higher buy. The same can be done in a downward trending market but in the opposite direction.
Enjoy the many benefits of trading gold mining ETF with AvaTrade
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