2023-03-11 07:13:16 ET
Summary
- GOAU provides exposure to precious metal producers and royalty companies.
- The ETF's composition is heavily skewed towards royalty companies.
- Royalty companies have historically outperformed due to lower business risks. However, GOAU's historical returns have only matched the producer-heavy GDX.
- I think investors are better off buying a basket of royalty companies instead of holding GOAU.
The U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) provides exposure to precious metal companies that are selected and weighted using U.S. Global's proprietary composite scoring methodology. The GOAU is heavily skewed towards royalty and streaming companies.
Historically, royalty and streaming companies outperformed precious metal producers and miners because they have less business operating risks. However, despite a 30% weight in the 3 large royalty companies, GOAU's returns have only matched the producer-heavy GDX ETF, which is disappointing. Investors may be better off buying and holding an equal-weighted basket of the large royalty companies instead of the GOAU.
Fund Overview
The U.S. Global GO GOLD and Precious Metal Miners ETF gives investors exposure to precious metal miners and royalty companies. The GOAU ETF tracks the U.S. Global Go Gold and Precious Metal Miners Index ("Index"). To qualify for the index, U.S. or international companies must derive at least 50% of their revenues from precious metals, either actively through mining and production or passively through royalties and streaming.
The index is composed of four 'tiers' of companies (Figure 1). Using a composite scoring system that combines multiple fundamental factors such as revenue per employee, operating cash flow per employee, and gross margin, the three highest scoring companies with at least $1 billion in market cap are each assigned 10% weights ('tier 1'). The next 5 highest scoring companies with at least $400 million in market cap are each assigned 4% ('tier 2'). Then the next 10 highest scoring companies with at least $300 million in market cap are each assigned 3%. Finally, the next 10 highest scoring companies with at least $200 million in market cap are each assigned 2%.
Figure 1 - GOAU Index categorizes companies into 4 tiers (GOAU prospectus)
The GOAU ETF has $77 million in assets and charges a 0.60% expense ratio.
Figure 2 - GOAU fund details (usglobaletfs.com)
Small Assets Mean Illiquid Price
With only $77 million in assets under management, the GOAU ETF is fairly illiquid, with a $0.25 / share bid-ask spread and daily volume of only ~$400,000 (Figure 3).
Figure 3 - GOAU is illiquid (nasdaq.com)
Portfolio Holdings
Figure 4 shows the top 10 holdings of the GOAU ETF as of December 31, 2022. Note that the fund's top 3 holdings are all royalty and streaming companies. This is due to the design of the index, which puts emphasis on per employee metrics. Large miners like Barrick Gold Corp. ( GOLD ) with thousands of employees will natural score poorly.
Figure 4 - GOAU top 10 holdings (usglobaletfs.com)
Returns
Figure 5 shows the historical returns of the GOAU ETF. The GOAU ETF had a poor 2022, with 1Yr returns of -22.4% to February 28, 2023. However, 3 and 5Yr average annual returns are modestly better, at 3.4% and 6.5% respectively.
Figure 5 - GOAU historical returns (morningstar.com)
Figure 6 shows the returns of the popular VanEck Vectors Gold Miners ETF ( GDX ) for comparison. The returns of GOAU and GDX are roughly comparable, with 3 and 5Yr returns of 2.4% and 6.2% for GDX to February 28, 2023.
Figure 6 - GDX historical returns (morningstar.com)
Distribution & Yield
The GOAU ETF pays a modest annual distribution, with 2022 distribution of $0.24 / share or 1.6% trailing yield.
Investors Better Off Buying Royalties As A Basket
Readers should know that I am a big fan of the royalty and streaming business model, as I believe it is far superior to the mining/producer business. For those not familiar, royalty and streaming companies like Franco-Nevada Corporation ( FNV ), Royal Gold Inc. ( RGLD ) and Wheaton Precious Metals Corp. ( WPM ) provide non-dilutive capital to mining companies that need capital to build a mine or expand output. In exchange for capital, these royalty and streaming companies take a royalty or stream of production (right to purchase a percent of output at fixed prices) from the mining company.
The beauty of the royalty and streaming business model is that the business risks, i.e. operating expenses and mining risks, are mostly retained by the operator. For example, while inflation has been hitting miners hard, with many like Barrick Gold Corp. reporting double digit cost inflation, royalty and streamers like Wheaton Precious Metals are relatively unscathed, with predictable 'production' costs (Figure 7).
Figure 7 - WPM has predictable production costs (WPM investor presentation)
Readers who want to learn more about the royalty business model can refer to my initiation article on Wheaton Precious Metals from a few months ago.
Over the long-run, the advantage of the royalty business model really shines through in terms of superior shareholder returns. For example, in figure 8 below, we compare the returns of the GOAU ETF, the GDX ETF, and an equal weight basket of the 3 large royalty companies for the period July 2017 (inception date of GOAU) to January 2023.
Figure 8 - Comparison between GOAU, GDX, and an equal weight basket of FNV/RGLD/WPM (Author created with Portfolio Visualizer)
Unsurprisingly, the equal weight basket of FNV/RGLD/WPM have far superior returns (14.8% CAGR returns) and lower volatility (30.2%) than either of the ETFs (Figure 9).
Figure 9 - GOAU vs. GDX and FNV/RGLD/WPM (Author created using Portfolio Visualizer)
What is surprising is the similar performance between GOAU and GDX, each with a CAGR return of 8.0%. Since the three biggest weights in the GOAU ETF are RGLD, WPM, and FNV, one would expect it to outperform the producer-heavy GDX ETF. Furthermore, the GOAU ETF actually has higher volatility of 35.1% vs. GDX at 32.7%. So in fact, it is an inferior fund compared to the GDX, despite its high allocation to royalty companies.
Conclusion
The GOAU ETF provides exposure to precious metals companies that are selected and weighted using U.S. Global's proprietary composite scoring methodology. The GOAU ETF's scoring system heavily weighs per employee metrics, which benefits royalty and streaming companies.
Historically, royalty and streaming companies outperformed precious metal producers and miners because they have less business operating risks like cost inflation and mining risks. However, despite having a 30% weight in the large royalty companies, the GOAU ETF's returns have only matched the producer-heavy GDX ETF, which is disappointing. Investors may be better off buying and holding an equal-weighted basket of the large royalty companies instead of the GOAU ETF.
For further details see:
GOAU: Investors May Be Better Off Buying The Royalty Companies Themselves