Dig for Gold, the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some gold explorers to your portfolio but don't have the time or expertise to hand-pick a few, the Global X Gold Explorers ETF (NYSEMKT: GLDX  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Global X ETF's expense ratio -- its annual fee -- is 0.65%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed, well, poorly. It has trailed the world market in 2011 and 2012, and is trailing badly so far in 2013. The future matters more than the past, though, so it's still worth considering if you're bullish on the future of gold exploration. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why gold?
Gold is not everyone's cup of tea, but some investors like to include some in their portfolios for diversifications' sake. Some also favor precious metals, as some of them have more utility. With gold's plunge this year, some have steered clear while others saw bargains.

It hasn't been a pretty past 12 months for gold-related companies due to falling gold prices, rising costs, a strengthening dollar, and even some labor difficulties around the globe.

Rubicon Minerals (NYSEMKT: RBY  ) plunged 60%. Focusing on high-grade gold in North America (which features more geopolitical stability than many other gold-laden areas), it has high hopes for its Phoenix Gold Project in Red Lake, Ontario. Still, it has been posting net losses in the past few years, issuing many more shares,  and burning an increasing amount of cash -- nearly $100 million over the past year, meaning that hopeful investors will need to be patient. According to a recent corporate presentation, the company expects to be producing gold in 2014.

Paramount Gold and Silver (NYSEMKT: PZG  ) , which is focused on Nevada and Mexico, sank 50%. It's also seeing its negative free cash flow increase, but its net losses have been shrinking. (Its share count has also been growing -- from close to 50 million shares in 2008 to nearly 150 million recently.) Its explorations have been yielding some promising results, too. Some like its involvement in both silver and gold, versus rivals focused only on gold, as that diversification can bolster it when one precious metal slumps. Another plus is that 16% of shares are held by insiders, with the CEO recently holding some 4 million of them.

Novagold Resources (NYSEMKT: NG  ) tumbled 45%, sporting a similar profile as other peers: negative free cash flow, a surging numbers of shares, and net losses, though 2012 featured a net gain of $68 million. It's involved in the potentially lucrative Donlin mine in Alaska, but it's looking like it might be too expensive to harvest gold there -- as well as at another Novagold property. The company hasn't given up, but its stock has burned not just small investors but even some hedge fund bigwigs such as John Paulson.

Seabridge Gold (NYSE: SA  ) fared relatively better, falling just 20%. Some of its operations in Canada have been yielding better-than-expected results, while its KSM Gold project in British Columbia is promising and progressing, featuring gold, silver, and copper. The company's strategy explicitly includes trying to avoid share dilution. It's still operating in the red, though, so tread carefully.

Each of the companies above is on the small side, with market caps recently below $1 billion.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

This isn't the only interesting ETF out there. You can learn more about a few ETFs that have great promise for delivering profits to shareholders by checking out The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.


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  • Report this Comment On September 10, 2013, at 10:36 AM, cynicalanddisgus wrote:

    "The company's strategy explicitly includes trying to avoid share dilution". I would hate to consider how much dilution SA would have had if it had explicitly included share dilution to provide operating capital.

    In a decade, SA has produced nothing but hype. No cash flow, no profits, no gold, Just Hype. It has been on a pretty good free fall from 35 in April 2011.

    " so tread carefully." - that is for sure.

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