Despite plenty of skeptics, gold has captured the attention of investors. You can now find many different ways to profit from a continuing boom in gold. But as someone who has held bullion coins since the days of $250 gold and $400 platinum, I think investors who truly think that precious metals are a valuable investment with profit potential even at current prices should look beyond putting their money into the Market Vectors Gold Miners ETF (NYSE: GDX).

Why you can do better
If you just look at the Market Vectors ETF's recent performance, you'll think I'm nuts. In the past two years since the financial crisis pushed the ETF to its lowest levels ever, the fund has more than tripled in price, outperforming even the corresponding doubling in the price of gold over the same timeframe.

But when you look at the ETF's longer-term performance, you'll see something disturbing: In its four-year history, it hasn't even kept up with the price of gold. And the reason has to do with a common problem among sector ETFs: a concentration of assets that ends up emphasizing just a small handful of stocks.

The pros and cons of sector funds
Like any other fund that focuses in on a specific sector, the Market Vectors ETF gives you exposure to many different gold mining stocks. The appeal to such an approach is that as an investor, you don't have to try to figure which stocks in the sector are the best ones to invest in. For the most part, by buying ETF shares, you broaden your investment exposure to the industry as a whole rather than any one particular company.

But the problem with the Market Vectors ETF is in how much it invests in just a few different stocks. Although the Market Vectors ETF has more than 30 different stocks in its portfolio, nearly 40% of your money goes into the top three stocks it owns: Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG), and Newmont Mining (NYSE: NEM).

What that means is that if you're looking to this ETF to get rid of stock-specific risk in the mining industry, think again -- because you still have it. And the question you have to ask yourself is this: Do I want to have so much of my money invested in these three miners?

The better way
For many gold investors, the answer is a resounding no. Looking back to the Market Vectors ETF's beginning date in May 2006, you'll see that Barrick, Goldcorp, and Newmont haven't exactly distinguished themselves. Barrick is up around 55% and Goldcorp has risen 40%, but Newmont has risen a scant 18%. Given that gold prices have doubled during the same period, their share performance hasn't met the expectations of many gold investors who see mining companies as a way to leverage gains in underlying bullion prices.

More importantly, the biggest industry players don't necessarily have the same agenda that many gold investors are looking for. Only last year did Barrick finally decide to give up its costly gold hedging strategy, having to take a $5.6 billion charge and use a highly dilutive equity offering to raise the money to reverse its hedges. Newmont had slightly better timing but still waited until 2007, when the bull market in gold was over 8 years old, to take off its hedges. In contrast, smaller players like Yamana Gold (NYSE: AUY) and Agnico-Eagle Mines (NYSE: AEM) have been unhedged for some time.

Go your own way
Of course, not every sector ETF has this issue. Oddly enough, the ETF's sibling fund, Market Vectors Junior Gold Miners (NYSE: GDXJ), which started in November 2009, doesn't have the same concentration issues. It has 60 stocks, and only one of them makes up more than 4% of the portfolio.

But for the elder ETF, paying annual costs of 0.53% for a relative lack of diversification doesn't seem to make a lot of sense, especially when you look at what's turned out to be mediocre performance. You'll do a lot better by recognizing the value of picking the individual mining stocks that are best positioned to make the most of the popularity and potential of precious metals as investments.

Did you hear? There's a new reason to be bullish about gold.