U.S. Global's New Gold ETF Brings a Quant's Approach to the Metal

  • Firm uses smart beta factor strategies to target companies
  • Investors have pulled record amounts from gold funds this year

Gold is losing its luster with investors in exchange-traded funds. But an active asset management firm is betting it can bring back that shine using popular smart beta strategies.

U.S. Global Investors Inc., a San Antonio, Texas-based asset manager that oversees mutual funds focused on gold and other similar commodities, listed the U.S. Global GO Gold and Precious Metals Miners ETF, symbol GOAU, on June 28. The fund holds royalty and streaming companies in addition to gold miners and producers, according to Frank Holmes, the firm’s chief executive officer. The ETF also weights its holdings not by size but by fundamental factors, such as revenue per employee, which Holmes says gives it an edge over its rivals.

“What we’ve done, as active managers, is said, ‘Let’s apply a quant approach,’” he said.

The ETF enters the field at an awkward time. Gold is down roughly 10 percent from its July 2016 peak. And even after miners posted their best profit margins in four years they’re finding it difficult to cut costs further, leading some investors to call a top for the sector.

ETFs tracking miners became investor darlings last year as the price of gold climbed, but have since fallen out of favor as investors have pulled record amounts of cash from the funds this year. After swelling to as much as $12.4 billion in April, assets in the VanEck Vectors Gold Miners ETF, the largest tracking that part of the industry, shrunk by more than 30 percent. In May alone, investors withdrew $1.4 billion from the ETF, according to data compiled by Bloomberg.

Prevent Snafus

As if that weren’t enough, earlier this year the $3.8 billion VanEck Vectors Junior Gold Miners ETF, the second-biggest fund tracking the sector, ran into trouble when it was so swamped with cash that its stakes in some mining companies grew beyond 10 percent, a threshold more familiar to activist investors than passive ETFs. On April 13, the index provider widened the criteria for inclusion in the gauge, enabling the fund to choose from a broader array of stocks but spooking investors in the process.

Chris Sullivan, a spokesman for VanEck Vectors with MacMillan Communications, declined to comment.

The U.S. Global ETF is designed not only to outperform competing funds, but also to prevent a Junior Gold Miners-style snafu, Holmes said.

“When I see a product like this, I can hear the complaints that the issuer probably identified,” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence. “It’s a correction of a problem with an existing ETF. That’s how all innovation happens.”

Holmes said that the $2.3 million fund has outperformed the far larger VanEck funds over 12-month periods in backtests. While it may prove less volatile than other ETFs, it’s unlikely to keep up with the biggest, most liquid gold mining companies when the metal goes on a tear, according to Howie Li, co-head of the Canvas platform at ETF Securities LLC.

“This one seems to prioritize stability over ultimate growth,” he said. “Some investors might say, ‘I manage risk on my portfolio, but I want the maximum amount of performance when I do allocate to this asset class.’”

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