In this article, let´s take a look at Market Vectors Gold Miners ETF (GDX, Financial) which is a favorite ETF for David Einhorn (Trades, Portfolio). As of Dec. 31, 2013, hedge fund Greenlight Capital owned 8.8 million shares.
Market Vectors Gold Miners ETF
Market Vectors Gold Miners ETF is incorporated in the U.S. This vehicle tracks the performance of the Arca Gold Miners Index. It invests in materials stocks of all cap sizes around the world. When looking to the greatest allocation, we can see that this happens in the North American companies, principally in Canada, because most of the fund's holdings are based outside the United States.
Diversification Rules
No single stock can make up more than 20% of the portfolio. In case a stock has more than 4.5% of the portfolio, it is capped at 50% of the index's total assets. Despite the rules, the top three holdings make up almost a third of assets (32.41%).
Other ETFs which constitute global gold securities investments: SPDR Gold Trust (GLD) and Market Vectors Junior Gold Miners ETF (GDXJ). For investors looking for direct exposure to gold, they should consider iShares Gold Trust (IAU).
Value at Risk
Value at risk (VaR) is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. VaR is the dollar or percentage loss in portfolio value that will be equaled or exceeded only X percent of the time.
So there is an X probability that the loss in portfolio value will be equal to or greater than the VaR measure.
The analyst must select the X percent probability and the time period over which VaR will be measured. Generally, it is used a one-day period.
We can obtain from Bloomberg the calculation of this measure. Although there are various methods, now we are going to concentrate on the Monte Carlo Simulation. This method generates hundreds, thousands or even millions of possible outcomes from the distributions of inputs specified by the user.
We are now assuming you are a risk manager and calculate the daily 1% VaR. The VaR (1%) indicates that there is a 1% chance that on any given day, the portfolio will experience a loss of $175,484,528 or more. We could also say that there is a 99% chance that on any given day the portfolio will experience either a loss less than $175,484,528 or a gain.
The loss represent 2.8% of the portfolio value, then on any given day there is a 1% chance that the portfolio will experience a loss of 2.8% or greater, but there is a 99% chance that the loss will be less than 2.8% or a percentage gain greater than zero.
Trailing Total Returns (as of 11/30/2014)
The fund has generated a total return of -18% in the last five years, -32.26% in the last three years, and -16.82% in the last year. But in November, as we can appreciate it has an attractive return.
| Period | Market Return % | NAV Return % |
| 1-Month | +6.68% | +5.78% |
| 3-Month | -31.21% | -30.81% |
| 6-Month | -18.40% | -17.68% |
| Year-to-date | -13.11% | -12.67% |
| 1-Year | -16.82% | -16.05% |
| 3-Year | -32.26% | -32.09% |
| 5-Year | -18.00% | -17.85% |
Final Comment
Value at Risk was developed as an efficient method to determine the risk exposure of banks with complex assets. As outlined in the article, the Monte Carlo simulation approach revalues a portfolio for a large number of risk factor values, randomly selected from a normal distribution.
If we analyze history, Gold has been a good diversifier to a stock or bond portfolio, and Gold miners look attractively valued relative to gold. So for those investors seeking to invest their money, this ETF could be a good option.
Hedge fund gurus have also been active in the company. John Burbank (Trades, Portfolio) and Arnold Schneider (Trades, Portfolio) have taken long positions in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks or funds mentioned.
