How the Market Vectors Gold Miners ETF (NYSE Arca: GDX) Can Work for Your Portfolio

Gold mining stocks were hammered over the last two years. But the top gold mining investments, like Market Vectors Gold Miners ETF (NYSE Arca: GDX), are poised for a comeback.

"The past couple of years have seen considerable pressure on most gold equities, thanks in large part to a declining then consolidating gold price," Money Morning Resource Specialist Peter Krauth said. "That became a major challenge to gold miners as they've tried to grow production despite falling gold grades."

The pressure caused many gold mining companies to falter, while the top companies were able to separate themselves – and even become stronger.

"The best mining companies met these challenges by controlling and lowering costs, focusing on the most viable projects, reining in capital expenditures, and even divesting suboptimal assets," Krauth said.

GDX invests in some of the top gold mining stocks – in fact, one of its largest holdings was recently recommended as a strong investment by Krauth.

Let's take a closer look at GDX and how it operates…

How GDX Works for Investors

GDX is designed to follow the New York Stock Exchange's Arca Gold Miners Index (GDM).

That means it operates differently than other gold-related ETFs and stocks. Instead of holding physical gold, or tracking gold's price, GDM – and therefore GDX – tracks the aggregate performance of a number of public gold mining companies.

That's important because investing in gold mining stocks has a few advantages over buying or tracking physical gold and gold prices.

You see, gold mining stocks have a higher upside potential than does the actual metal. When gold prices rise, a company's stock can realize gains well past the jump in gold prices themselves.

The mining companies GDX tracks are a mix between small, medium, and large enterprises, but there's one common denominator – gold mining is their primary endeavor. That means the driving force behind GDX's rises and falls is the level of investment in each company, and those companies' operating performance as producers in the gold sector.

Similar to other ETFs, GDX has fairly low management fees – those pesky charges that cut into an investor's potential profit. The general management fee is 0.5%, which is approximately one-half to one-third of what an investor would be charged by fund managers of a gold mutual fund.

But here's the unique benefit that GDX offers over other gold mining investments…