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, , , or other investments. They are called ‘exchange traded’ simply because they can be traded on an exchange, much like stocks, commodity trading, bonds, or other financial assets. They are called ‘exchange traded’ simply because they can be traded on an exchange, much like stocks, indices trading.
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.
Why Trade ETFs?
Since the beginning, ETFs have provided investors with many benefits, including:
When trading ETFs, you can enjoy a unique benefit. Since ETFs are not actively managed, they have fewer associated costs. In addition, an investor only pays standard trading costs but is able to trade multiple assets at the same time.
Since they are composed of multiple assets, ETFs allow an easy and automatic diversification of one’s trading portfolio. This saves investors a lot of time and effort , as asset allocation is left to the professionals. They don’t have to track every detail associated with individual assets. Instead, the only important thing to understand is the fund investment objective.
ETFs also have a unique feature where an investor can trade an array of pre-selected financial assets. When an individual asset is underperforming, it lessens the overall impact on the ETF’s price. In contrast, when trading individual financial assets, you will likely experience a much bigger impact when an asset is performing poorly
Choosing the Right ETF
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:
Liquidity will determine your trading costs, so it is important to choose highly liquid ETFs. An ETF’s liquidity comes from two sources: the fund itself, as well as the liquidity of its underlying assets. Generally, funds with large assets and high average daily trading volumes, are highly liquid and usually have tighter spreads.
In the ETF world, market position is very important. The first mover advantage is significant as it enables a fund to differentiate itself and attract investor funds. Additionally, a first mover will often have the advantage of garnering the majority of assets before other funds join in on the party. In the long run, first movers will generally have higher liquidity and larger average daily trading volumes.
It’s essential to determine your investment focus when choosing the right ETF to trade. This process involves choosing the asset class to trade, be it equities, commodities or bonds. After settling on the asset class, it is prudent to consider your diversification strategy. You can choose to spread your wealth across an asset class or to trade a market segment. For example, if you decide to trade equities, you could choose a specific industry, such as mining, or you could select a specific country, such as the United Kingdom. ETFs give you the opportunity to take full control of your diversification strategy.
It is vital to consider the composition of the fund to be traded. A good fund will give you broad exposure to the industry or country you wish to track. This means having more assets under its belt. Having more assets also guarantees broader diversification and less exposure to market risk.
Is GDX a Good ETF to Trade?
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 51 bps (basis points), a tad higher than the average 40bp in the industry. But it's 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 trading, 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 stock trading 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.
How to Calculate the GDX?
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.
How to Effectively Trade the GDX?
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.
Trading GDX as a CFD
GDX has unique characteristics which makes it very lucrative to be traded as a CFD
(Contract for Derivative). 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.
GDX Trading Information
Trading Time: Monday – Friday 13:30 – 19:59 GMT
Exchange: NYSE Arca
Typical Spread: 0.13%
Minimum Trade Size: 10