Under The Hood: An Unheralded Mining Play (TSXV, GDX)
Federal Reserve Chairman Ben Bernanke didn't do gold bugs any favors on Thursday when he refused to walk down Quantitative Easing Boulevard a third time. While the central bank chief did say the Fed stands ready to act, those comments cannot be taken to mean QE3 is imminent and that proved to be problematic for gold and gold miners.
Ah, yes. The gold miners, home to so much good recently mining stocks and ETFs crumbled in the wake of what Bernanke did not say. Sure, it can be said the likes of the Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners (NYSE: GDXJ) were near-term overbought and due for a pullback, but Thursday's action was quite nasty.
However, traders might want to take advantage this distribution day to consider some backdoor approaches to gold miners. Let the dust settle for a day and then have a look at an ETF such as the IndexIQ Canada Small-Cap ETF (NYSE: CNDA) or the unheralded Global X S&P/TSX Venture 30 Canada ETF (NYSE: TSXV).
The Global X S&P/TSX Venture 30 Canada ETF, which is just 15 months old and charges an expense ratio of 0.75% per year, isn't heavily traded, but the index employs a liquidity-driven weighting scheme and each stock must trade on average, at least 100,000 shares-per-month during the 6 months preceding the rebalance reference date, according to Standard & Poor's. So while TSXV's average daily volume of just 1,900 shares per day may seem off-putting, the fund's overall liquidity may prove to be a pleasant surprise to some.
Not that this is an ETF for income investors, but TSXV has a 2.77% yield, a nice surprise as well, and that's better than what S&P 500 and Dow Jones Industrial Average tracking ETFs offer.
As an ETF that embraces the commodities/materials aspect of the Canadian economy, TSXV has seen its shares slide 7.3% in the past month has the commodities trade has been punished. A 38% allocation to energy stocks has obviously been a problem for the fund, but TSXV's secret sauce for a potential rebound is its exposure to gold miners, something the ETF is rarely given credit for.
Metals miner Rio Alto is TSXV's second-largest constituent with a weight of 11%. Of the ETF's top-12 holdings, ten are engaged in the mining of gold and silver and those stocks combine for over 40% of the fund's total weight. Overall, more than half of TSXV's weight is devoted to precious metals mining firms, implying this is an ETF that will benefit as the miners regain prominence and start either participating in gold and silver's upside or outperforming the underlying metals outright.
TSXV's caveat isn't the volume or the fees, it's the oil exposure, which is to say more quantitative easing would surely help this fund because there's no getting around the fact that oil demand is slack at the moment. Looking at the chart, the $9.25-$9.60 area is probably safe to nibble on TSXV with a stop at $8.40. If the 200-day moving average is cleared, TSXV could run to $11.50-$12.
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