Gold mining stocks are one way for investors to gain exposure to gold. We take a closer look at the key considerations around this approach.
Gold has long been considered an enduring store of value even under the most adverse economic conditions. Often overlooked in periods of prosperity, gold can also serve several important roles beyond a safe haven asset. Gold has historically enhanced portfolio diversification, served as an inflation hedge, and provided appreciation potential.
As a real asset, investing in gold can come with unique considerations such as tax treatment or the storage and safekeeping of the metal. Alternatively, many investors look to stocks of companies that find and extract gold, an approach that comes with its own set of considerations. In this Q&A, we address frequently asked questions about investing in gold miners and specifically about the VanEck Gold Miners ETF (GDX) and VanEck Junior Gold Miners ETF (GDXJ).
Q: What are gold miners?
A: The gold mining industry consists of companies whose primary business activities are exploring, mining, and refining the precious metal.
The lifecycle of the gold mining process is extremely long and arduous. It also requires significant capital. Many new and small mining companies are unable to endure the time required to produce materials that can be refined. On average, it takes over 20 years before a mine reaches production.
Gold miners are often classified into three primary groups:
- Majors – Tend to be less volatile, more mature mining companies, with larger portfolios than their smaller peers. These are well-capitalized companies with decades of history and world-spanning operations.
- Mid-tiers – A mix of companies with sizable and diversified gold production, substantial growth potential, and smaller market capitalization. They tend to exhibit less risk than their exploration peers.
- Juniors – Increased risk, but with the potential to offer higher upside; focused on the exploration and development of newer mining operations. Also, often acquisition targets of larger, more established operators.
Q: How is investing in gold miners different from gold?
A: Though gold miners are heavily influenced by movements in the price of gold, they are subject to equity market risk and have historically exhibited higher levels of volatility than the metal itself. They have offered higher beta exposure to gold prices, meaning they tend to appreciate more when prices rise and decline more when prices fall.
This leveraged exposure to gold prices can make them attractive in various market conditions, but investors should consider the elevated risk and remember that gold miners may not always offer an investment experience highly correlated with that of gold.
Tax treatment also varies by investment approach. For example, collectables, such as precious metals, are subject to a maximum long-term capital gains tax of 28%. This tax rate also applies to ETFs that are physically backed by gold and other collectables. Gold mining ETFs, by contrast, hold company stock and are subject to a maximum long-term capital gain rate of 20%.
Q: How do gold and gold mining stocks fit into a portfolio?
A: Investors typically consider allocations to gold or gold miners for portfolio diversification and as an inflation hedge. However, gold also offers the potential for upside appreciation. In fact, gold has outperformed U.S. stocks, U.S. bonds and U.S. treasuries since the beginning of the century.1 Additionally, because of their targeted exposure and liquidity, gold mining stocks can also be used tactically by investors to express a short- or long-term view with a highly liquid, low-cost ETF.
Gold has also historically served as a safe haven during market turbulence. For example, since 2008, gold has outperformed U.S. stocks and treasuries during the most significant market crises.
Gold Bullion vs. U.S. Stocks and Treasuries in Recent Market Crises
Source: Morningstar. Data as of June 2020. US Stocks represented by S&P 500 Index; Gold Bullion represented by LBMA PM Gold Price; US Treasuries represented by the Bloomberg Barclays US 1-3 Year Treasury Bond Index. Past performance is not indicative of future results. Indices are not securities in which investments can be made. An index’s performance is not illustrative of a fund’s performance.
Q: What are VanEck’s gold mining ETFs?
A: The VanEck® Gold Miners ETF (GDX), launched in 2006, is the first gold miners ETF in the U.S. It seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index (GDMNTR), a pure-play, global index, tracking the performance of the largest publicly-traded companies in the gold mining industry.
The VanEck Junior Gold Miners ETF (GDXJ) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Global Junior Gold Miners Index (MVGDXJTR), which is intended to track the overall performance of small-capitalization companies that are involved primarily in the mining for gold and/or silver.
Q: What is a PFIC distribution, and why is it important if you own gold miner ETFs?
A: Investors should be aware of PFIC (passive foreign investment company) income as they engage in tax planning. A PFIC is a foreign corporation having 50% or more of its assets invested in cash or securities, or having 75% or more of its gross income originating from passive sources, including but not limited to interest, dividends, and rents. Simply put, foreign companies that generate revenue from investments, and not operations, may be considered a PFIC.
As a result, shareholders of gold miner ETFs may receive distributions taxed as ordinary income in years they are deemed to have PFIC exposure. Market performance impacts PFIC tax treatment. Because funds mark-to-market unrealized gains of PFICs annually in order to distribute the gains as income to shareholders, those funds with significant exposure to PFICs in a strong performing market may be required to distribute a significant amount of income to shareholders.
Because of the complexity of this area of tax code, it is important to consult your tax advisor. Read for more information.
Q: Do VanEck’s gold mining ETFs generate Schedule K-1 tax statements?
A: No. Unlike an investment in many commodity strategies, the equities of gold miners do not generate burdensome K-1 tax statements.
Q: How can investors buy VanEck ETFs?
A: Learn more here: GDX and GDXJ.
Originally published on 4 August 2022 by VanEck.
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Important Disclosures
1 Source: FactSet. Data as of March 2022. U.S. Stocks represented by S&P® 500 Index; U.S. Bonds represented by Bloomberg Barclays U.S. Aggregate Bond Index; Gold ($/oz) represented by LBMA PM Gold Price; US Treasuries represented by the Bloomberg Barclays US 1-3 Year Treasury Bond Index. Past performance is not indicative of future results. Indices are not securities in which investments can be made.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of 3rd party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
An investment in the VanEck® Gold Miners ETF (GDX) may be subject to risks which include, among others, investing in gold and silver mining companies, basic materials sector, Canadian and Australian issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s return. Small- and medium-capitalization companies may be subject to elevated risks.
An investment in the VanEck Junior Gold Miners ETF (GDXJ) may be subject to risks which include, among others, investing in gold and silver mining companies, basic materials sector, investing in Australian and Canadian issuers, foreign securities, emerging markets, foreign currency, depositary receipts, micro-capitalization, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, concentration and tax reform legislation risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s return. Small- and medium-capitalization companies may be subject to elevated risks.
Index descriptions: The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made. NYSE Arca Gold Miners Index comprises publicly traded companies involved in the gold and silver mining industry. MVIS Global Junior Gold Miners Index comprises a focused group of small-cap companies, many of which are involved in the exploration and development of new sources of gold either through greenfields exploration or the use of new geologic models to prospect for gold in overlooked or abandoned properties. Bloomberg Barclays U.S. Aggregate Bond Index is composed of the mortgage-backed and asset-backed securities and government/credit bonds. Bloomberg Barclays US 1-3 Year Treasury Bond Index is designed to measure the performance of the short term U.S. corporate bond market.
NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck ETF Trust (the “Trust”) in connection with VanEck Gold Miners ETF (the “Fund”). Neither the Trust nor the Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Trust or the Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.
ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
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