SGDM - SGDM: A Bet On Active Managers

2023-12-01 07:24:44 ET

Summary

• Gold is on the verge of closing a monthly candle above $2,000 per ounce, signaling a breakout.
• Gold miners have historically outperformed gold during uptrends, making them a potential opportunity for investors.
• The Sprott Gold Miners ETF (SGDM) has generally lagged behind other gold miner ETFs in performance.
• SGDM is more actively managed than peers. That hasn't worked well in the past, but if silver miners outperform gold miners from here, SGDM could outperform ETF peers.

Gold ( XAUUSD:CUR ) is about to do something it has never done; close a monthly candle above $2,000 per ounce. I've laid out how I personally see the fundamental setup for gold multiple times through previous Seeking Alpha articles. Generally, I express my fundamental gold bullishness through both ownership and coverage of the Sprott Physical Gold Trust ( PHYS ):

• Follow The Yellow BRICS Road
• Yields Are Spiking, Buy Sprott Physical Gold Trust Anyway

In my view, bulls are finally about to conquer the "triple top" that has served as a seller's pivot point over the last three years. This November 2023 close is a big deal, in my view. Gold is in the process of breaking out. And while I still believe it makes sense to hold the Sprott bullion fund and let it run, for trading purposes there are various ways to capitalize on a gold breakout.

The gold miners immediately come to mind, as they have historically done well when Gold is taking another leg up. One very short-term tactical way to bet on miners is through the Direxion Daily Junior Gold Miners Index Bull 2X Shares ETF (JNUG) which I recently covered for Seeking Alpha. As I noted in that JNUG article, leveraged funds are highly risky and require active management. For the more "buy and hold" minded, non-leveraged mining ETFs are a safer option.

Miners vs. Gold

Even as the price of the metal is flirting with a legitimate breakout, the gold miners have continued to lag the metal dramatically over the last three years:

While there has been a notable uptick in miner share prices in November, many of these companies haven't gone anywhere in a year and are still well behind their COVID bull run highs. However, when precious metals are in the thick of large uptrends, the miners generally outperform the metals:

Looking at the VanEck Gold Miners ETF ( GDX ) against gold over the last 10 years shows underperformance during the bad times and outperformance during the good times. When thinking about a metal miners strategy, investors can go in a variety of different directions:

• Buy the market cap leading blue chips
• Buy the smaller exploration companies
• Buy a diversified ETF
• Or some combination of all three

Since my core competency isn't getting deep into the weeds regarding things like production and ore grades, I think the ETF approach makes more sense than trying to pick individual winners for me personally.

Gold Miner ETFs

Looking at the miner ETF market, GDX is the largest fund in the group, with over $13 billion in assets under management. Excluding the funds that are specifically allocated to the junior miners, the biggest three gold miner ETFs are GDX, iShares Global Gold Miners (RING), and Sprott Gold Miners ETF (SGDM).

Source: Seeking Alpha

If one is looking purely at expense ratio and dividend yield, RING appears to be the best pick of the three. But what is interesting about SGDM is the fund's smaller amount of holdings compared to RING and GDX. At just 35 holdings, Sprott Gold Miners ETF is more curated than the other two.

This larger degree of curation may not be unexpected, as SGDM's 73% turnover ratio is indicative of a fund that is far more actively managed than GDX or RING. Also worth noting, even though RING has more holdings under management than SGDM, those holdings are more concentrated in the top 10 companies than SGDM or GDX. So the question is which strategy is going to work when the bull run really takes off in the mining sector?

Looking at the ten-year total return of the funds, SGDM looks terrible by comparison. While up 10% over the last ten years, it has significantly lagged both GDX and RING. But the question actually isn't which fund is safer over time. We want to know which fund will outperform when gold takes the next leg higher. For that, we can look to the 2020 bull run in gold and see how each ETF performed.

Here we see the performances flipped. In the chart above, I'm showing the total returns of these three ETFs between the 2020 bottom on March 16th and the 2020 peak on August 5th. SGDM did better than GDX and RING. However, we can go back further. Let's say we wanted to measure the performance from gold's post-2011 cycle bottom in late 2015 to the 2020 peak:

In this instance, SGDM lagged both RING and GDX for essentially the entire bull run. RING was the standout and generally was the top performer during the entire duration of the run. Sprott is a company that is synonymous with precious metals. So the fact that Sprott's gold mining ETF has lagged the more passively managed VanEck and iShares funds is telling.

Fund Holdings

Given the high turnover and the smaller total holdings, it's worth looking at SGDM's top 10 holdings to get a sense of how the fund is currently allocated:

A couple of things stand out to me here. At 32.9%, SGDM is actually more allocated to Newmont, Barrick Gold ( GOLD ), and Agnico Eagle Mines ( AEM ) than GDX is. I also see 7.8% combined exposure to Fortuna Silver Mines ( FSM ) and Pan American Silver Corp ( PAAS ).

I'm bullish on silver as well, but I suspect allocations to silver miners have possibly weighed on SGDM in recent years as those stocks have been taken to the woodshed to a larger degree than the gold stocks.

Final Takeaway

Of course, none of this means that SGDM can't outperform GDX or RING in a broader gold bull run that sees new highs. The old adage is past performance is not an indicator of future returns. But if I was choosing between the three ETFs mentioned in this article for a longer-term passive hold, I'd probably go with RING over SGDM or GDX. RING is more of a gold miner pure play, and silver's use as an industrial metal could potentially hinder its performance if the economy is in or entering a recession. All this said, I'm going to rate SGDM a "buy" because I believe the fundamental setup for gold is terrific, and the miners have quite a bit of catching up to do. I just personally prefer to play the run in miners differently than longing SGDM.

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