Gold Miners: How to get the best players in the space

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U.S. Global Investors rolled out an intelligent, smart beta exchange traded fund on Wednesday that has a focus on the quality gold miners segment.

As part of the launch, U.S. Global Investors CEO and Chief Investment Officer Frank Holmes will ring the bell at the New York Stock Exchange on Thursday afternoon to help usher in U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEArca: GOAU).

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.

“This ETF is an intelligent product,” Holmes told ETF Trends. “We’ve been working on the methodology for the past three years. It uses a smart, quant-factor approach to scoop up the best names in the gold space. You know, so many other ETFs do a great job of aggregating all the public companies in the gold space – but GOAU is different because it really digs down to find the best quality stocks.”

Specifically, GOAU tries to reflect the performance of the U.S. Global Go Gold and Precious Metal Miners Index, which 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.

According to the prospectus, each tier will be populated with those having revenue per employee that is greater than the median for companies whose revenue per employees is in the top 20th percentile of the broader universe. Additionally, the screen also factors in operating cash flow per employee and gross margin.

“One of the unique factors we do look at is revenue per employee, which yields royalty and streaming companies,” Holmes said. “I like to call these companies the ‘smart money’ of the metals and mining space. So names like Franco-Nevada, Wheaton Precious Metals and Royal Gold are weighted higher. And what’s interesting to note is royalty and streaming names not only gives investors exposure to the space, but does so with potentially less risk.”

GOAU includes a 30% tilt toward royalty and streaming companies, which Holmes believes will 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.

Top holdings include Royal Gold 9.8%, Wheaton Precious Metals Corp 9.8%, Franco Nevada Corp 9.8%, Kirkland Lake Gold 4.0% and Premier Gold Mines 4.0%.

Gold miner ETF investors may have recently seen some major shifts in their portfolio exposure as some ETF plays have grown too big for their own holdings. Consequently, investors may consider a smart beta gold miner play as an alternative to gain exposure to more undervalued picks.

“The gold mining market has gone through a big disruption over the past few months, with the GDXJ which grew so large that its constituents had massive share dilution, and then it had to sell off many of its holdings which just knocked down some really high quality names, like Klondex and Wesdome,” Holmes added. “I think now that the dust has settled from that, it is a good buying opportunity for many of these small- and mid-cap miners.”

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Disclosure: ETF Trends publisher Tom Lydon is on the board of U.S. Global Investors.