Sprott Gold Miners ETF (NYSE: SGDM) - Quality Holdings for Better Returns

Bigger isn't always better - and now the best minds at Sprott Asset Management have created a new gold miners ETF based on that principle that could deliver better performance than traditionally structured exchange-traded funds.

You see, gold miners ETFs, like Market Vectors Gold Miners Fund (NYSE Arca: GDX), typically take a simple market-cap-weighting approach.

gold miners ETF

But with larger miners saddled over the last few years with high debt, rising costs, and high sustaining costs for projects that are too costly to operate and are currently on "care and maintenance," this isn't necessarily the best strategy.

The new Sprott Gold Miners ETF (NYSE Arca: SGDM) offers a compelling alternative to traditional gold miners ETFs.

Here's how SGDM is different - and why it promises better results...

Sprott Gold Miners ETF Emphasizes Quality over Size

Rick Rule, head of Sprott US Holdings, explains that SGDM is performance-related, rather than market-cap-weighted. It tracks the Sprott Zacks Gold Miners Index, which is rules-based and rebalanced quarterly.

The Gold Miners Index seeks to identify about 25 gold stocks with the highest historical beta to the gold price. The weighting also depends on quarterly revenue growth year over year and balance sheet quality (long-term debt to equity).

Essentially, the rules-based method looks to identify quality rather than size and then allocates on that basis every three months.

In tracking the Sprott Zacks Gold Miners Index, SGDM seeks out the healthiest companies in the sector and adds them to the ETF's holdings.

As a result, current holdings show a high concentration in three names: Franco Nevada Corp. (NYSE: FNV) at 16%, Randgold Resources Ltd. (Nasdaq ADR: GOLD) at 15%, and Goldcorp Inc. (NYSE: GG) at 13%. What's also interesting is that besides Franco Nevada, the two other largest royalty/streamer companies, Royal Gold Inc. (Nasdaq: RGLD) at 4% and Silver Wheaton Corp. (NYSE: SLW) at 3%, make it into the top 10 holdings.

In addition to its focus on quality, there's another big reason for investors to love the Sprott Gold Miners ETF...

That's because SGDM also comes with the standard fare that makes ETFs attractive: a low management fee of 0.57%, diversified holdings within sector, and passive management.

Now, SGDM is still relatively small (with a market cap of about $39 million) and lacks some liquidity (about 55,000 shares/day volume) - but the fund's allocation strategy is a considerable improvement over other more static approaches.

Gold and silver stocks are trading at multi-year lows on a nominal basis, as well as in relation to the prices of both gold and silver, but as the precious metals bull market regains its footing, I believe informed investors searching for a diversified sector play will migrate to the Sprott Gold Miners ETF.

More on Precious Metals Investing: Resource Specialist Peter Krauth has long believed that gold prices will go much higher, and now prominent gold mining experts are following suit. Here's how the yellow metal will reach $5,000 an ounce...