GOAU ETF: Good Choice For Mining Company Exposure

Introduction

Formed in 2017, the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEARCA:GOAU) (hereinafter referred to as the “Fund“) is an exchange traded fund (“ETF“). U.S. Global Investors, Inc., a publicly traded asset management firm (GROW) (hereinafter referred to as “GROW“), manages the Fund.

Domiciled in the U.S., the Fund invests in a global basket of less than 30 mining stocks. A non-diversified ETF, the Fund invests in companies of varying market capitalizations. Specifically, the Fund seeks to track the performance of the U.S. Global Go Gold and Precious Metal Miners Index (the “Index“). The Index uses a proprietary multi-factor, rules-based model and, notably, precious metals companies that rely primarily on debt to finance their business are removed from the Index.

Outlook for GOAU

A number of factors bode well for the Fund in 2023, including inflation having peaked, interest rates on a declining trend and lower input costs as energy costs start to finally pullback. In addition, central banks are firming up their balance sheets by buying record amounts of gold. Moreover, operating cash flows for miners are strong according to Fitch Ratings.

Finally, Frank Holmes, the CEO and chief investment officer of GROW, also propounded a bullish case for the yellow metal to reach $3,000 an ounce in a recent Seeking Alpha article. The crux of Holmes’ case for gold:

Will 2023 be the year that gold hits $3,000 an ounce?

Ole Hansen, respected commodity strategist at Denmark’s Saxo Bank, says it’s possible once markets realize that global inflation will remain hot despite monetary tightening. I believe, as I’ve said before, that gold could climb as high as $4,000.

Hansen notes three other factors that could help push the metal to new record highs next year. One, an increasing “war economy mentality” could discourage central banks from holding foreign exchange reserves in the name of self-reliance, which would favor gold. Two, governments will continue to drive up deficit spending on ambitious projects such as the energy transition. And three, a potential global recession in 2023 would prompt central banks to open the liquidity spouts.

The analyst has already said that his comments are less of a forecast and more of a thought experiment, but I don’t think investors should brush him aside so easily. I believe it’s very possible that we could see $3,000 gold—or higher—in the next 12 to 18 months, for all the reasons he mentioned.”

For the reasons enumerated above, I expect gold and the other precious metals mining companies to perform well in the first half of 2023 and, thus, I am bullish on the Fund over the next 4-6 months. [Investors should be careful about entry points, however. As I write this article, the Fund is up more than 3% and mining companies are notoriously volatile. In short, wait for a pullback.]

TOP 10 HOLDINGS

The Fund’s top ten holdings, which include a heavy dose of Canadian mining companies, are listed below.

Data as of 12/09/2022 from the Fund’s website.

% Net Assets	Name	CUSIP	Country	Ticker	Shares Held	Market ($)
9.94%	ROYAL GOLD INC.	780287108	USA	RGLD	73,464.00	8,121,445.20
9.93%	WHEATON PRECIOUS METALS CORP. COM	962879102	Canada	WPM	208,177.00	8,116,821.23
9.87%	FRANCO NEV CORP.	351858105	Canada	FNV	57,285.00	8,066,300.85
4.28%	TOREX GOLD RES INC. COM NEW	BD2NKY1	Canada	TXG CN	314,414.00	3,497,200.60
4.12%	DUNDEE PRECIOUS METALS INC. COM	B00VD03	Canada	DPM CN	706,313.00	3,364,011.36
3.98%	SANDSTORM GOLD LTD	80013R206	Canada	SAND	619,747.00	3,253,671.75
3.96%	ANGLOGOLD ASHANTI LIMITED	035128206	South Africa	AU	175,139.00	3,236,568.72
3.95%	OSISKO GOLD ROYALTIES LTD.	68827L101	Canada	OR	263,059.00	3,225,103.34
3.04%	CHINA GOLD INTL RE	B60FNV8	China	2099 HK	848,301.00	2,484,873.68
3.02%	NEW GOLD INC. CDA	644535106	Canada	NGD	2,350,615.00	2,468,145.75

Fund Basics

TICKER: GOAU (NYSE)

CUSIP: 26922A719

EXPENSE RATIO: 0.60%

NUMBER OF HOLDINGS: 28

AUM: $82 MILLION

Rationale for Investing in GOAU

While this article has outlined above reasons to be bullish on precious metals, investors have lots of ETF options when it comes to investing in mining company equities. Popular options include the VanEck Gold Miners ETF (GDX) [more than $12 billion in AUM] (hereafter referred to as “GDX“) and the VanEck Junior Gold Miners ETF (GDXJ) [more than $3 billion in AUM] (hereafter referred to as “GDXJ“), both of which have attracted substantial investor assets — on an absolute basis and a relative basis compared to the Fund.

Notwithstanding these popular market-cap weighted ETFs, there is a lot to like about the Fund. For one, its manager, GROW, is an experienced innovator in the mining space, having launched a no-load gold fund in the U.S. in 1974. In addition, supported by his 30+ years’ of experience, CEO Frank Holmes developed a quant model that differentiates the Fund from other mining ETFs by focusing not just on mining stocks with large market capitalizations, as most similar ETFs do; rather, the Fund’s quant model screens for quality producers that have (1) a proven track record of sustainable profitability (even in downturns), (2) strong balance sheets and (3) attractive portfolios of active mines.

The Fund also differentiates itself by focusing on royalty and streaming companies. From the Fund’s investment case:

GOAU places special emphasis on North American royalty and streaming companies, which we consider to be the “smart money” of the metals and mining space. The fund is distinct for placing as much as 30 percent of assets in royalty companies.”

Caveats

While the low debt, profit focus of the Fund should, in theory win out over time, the reality of today’s markets is that passive flows can suck in the preponderance of investor capital and, by doing so, such funds automatically allocate substantial investor capital to large market cap companies such as Barrick Gold (GOLD) and Newmont Corporation (NEM), which make up more than 20% of GDX. In a bull market, these passive flows could propel these large cap holdings, whereas ETFs like the Fund which don’t prioritize market capitalization could suffer. That said, the Fund has outperformed GDX and GDXJ over the last five years.

ETF	1Y	3Y	5Y
GOAU	-6.75%	4.95%	40.93%
GDX	-0.69	10.66%	40.28%
GDXJ	-8.12	-3.53	20.77

Source: Seeking Alpha (as of 12/14/22)

The Fund’s expense ratio at 0.60% is reasonable, particularly in light of the Fund attracting less than 100 million in assets. GDX and GDXJ expense ratios are 0.51 and 0.52, respectively.

Another drawback of the Fund, particularly compared to GDX and GDXJ is the liquidity. In a nutshell, trading volume for the Fund is substantially lower than these competitors. As of the time of writing, less than 100,000 shares of the Fund have exchanged hands, while over 3 million shares of GDX and over 1 million shares of GDXJ have traded hands. As a result of the trading liquidity disadvantage, the bid/ask spreads on the Fund tend to be wider — making it necessary to implement limit orders (particularly if you are a trader). Other risks of the Fund are outlined in the prospectus.

Concluding Thoughts

Mining equities and precious metals are breaking out to the upside and the current macro backdrop is supportive of future gains. The Fund has experienced management, a rational quant model and solid long-term performance. The Fund has had trouble accumulating assets, however, and the low trading volumes make this ETF harder to trade. Nonetheless, I am bullish on the Fund and the precious metals and mining space, in general, over the next 4-6 months.