Commodity-Focused ETFs Post Unanimously Solid Returns In 2017

In 2017, the international mining industry built on the recovery of 2016, and the sector looks set for another positive year in 2018.

Global interest rates remained low in 2017, and the U.S. dollar did not appreciate to the extent that many analysts had forecast. Precious metals benefited as a result, and gold gained 13% over the year. Even the late emergence in popularity of bitcoins did not result in a run on gold. Silver was not far behind with a 10% annual price appreciation.

The demand for most base metals looks set fair this year after encouraging growth in 2017. Aluminum and copper led the way with annual price gains of 31% and 30%, respectively, followed by zinc and nickel at 27% and 22%, respectively.

Iron ore benefited from a year-end bounce to a year's high of over US$74 per tonne in mid-December, following an increase in China's steel consumption. However, most of the attention in 2017 was focused on battery metals, with cobalt, lithium, and vanadium companies shining as expectations for electric vehicles soared. Mining equities responded to the more favorable conditions, with most companies gaining ground. The majors in particular benefited not only from the higher commodity prices, but also from good housekeeping, with debt reduction being prompted by shareholders. The performance from smaller companies was much less impressive, with many still suffering from a shortage of finance.

There has been more attention by the major companies to their project portfolios over the past year, although there was some divergence in the response to investor demands for greater corporate focus. For example, Rio Tinto has opted out of coal and saw its share price rise 25% in 2017, while Glencore PLC retains its interest in the mineral and benefited from a 41% annual share price gain. Anglo American PLC continues to diversify out of South Africa and saw a 34% higher valuation. By comparison, the S&P 500 rose 19.4% in 2017. There were failures in portfolio adjustments, however, with BHP Billiton Group suffering from an early entry into U.S. shale oil in the U.S. and a problematic Canadian potash project. Its share price rose only 17% over the year.

The mining industry's solid performance in 2017 was reflected by increased holdings in commodity-focused exchange-traded funds. SPDR Gold Trust, which follows the gold spot price and invests in physical gold, ended 2017 with US$34.75 billion in assets under management, or AUM. This constitutes the largest AUM total among both commodity and equity funds. SPDR Gold Trust saw US$872 million in net inflows during 2017 and yielded a 12.8% return in the same time frame.

Competitors to SPDR Gold Trust include iShares Gold Trust, ETFS Physical Swiss Gold Shares, and VanEck Merk Gold. These commodity-focused ETFs ended the year with total assets of US$10.1 billion, US$1.04 billion, and US$136.4 million, respectively. iShares' US$1.96 billion in net inflows for 2017 was the largest among its peers, while Physical Swiss Gold Shares added US$6.1 million, and VanEck Merk saw US$10.2 million in new money.

These commodity-focused ETFs produced similar returns for 2017. SPDR Gold Trust and the smaller VanEck Merk fund returned 12.8% over the calendar year, while iShares and Physical Swiss Gold Shares yielded 12.9%. Returns for other commodity ETFs were mostly similar, although a notable performer was the ETF's Physical Palladium Shares fund at 55.7%. Despite this, the palladium-focused fund ceded US$27.5 million in assets during the year, ending 2017 with AUM of US$241.8 million.

Gold equity ETFs, which invest directly in mining stocks and posted stellar performances in 2016, saw a median 9.8% return in 2017, slightly lower than the 12.8% return among the commodity-focused ETFs included in this analysis.

The VanEck Vectors Gold Miners ETF is the largest fund to invest directly in gold companies, holding US$7.56 billion in assets with net outflows of US$2.99 billion during 2017. As of December 29, 2017, the fund's largest holdings include Newmont Mining Corp. (8.93%), Barrick Gold Corp. (7.61%), and Franco-Nevada Corp. (6.37%). Market value changes for these companies was varied in 2017, as Newmont and Franco-Nevada saw 10.7% and 39.5% rises, respectively, while Barrick's market value declined 9.4%. The VanEck Vectors Gold Minersfund returned 11.1% for the year.

Meanwhile, VanEck's smaller Junior Gold Miners ETF held US$4.63 billion in AuM at the end of 2017 while obtaining US$1.22 billion in new money. Like its counterpart, the fund saw a positive return during the year (8.2%), while its top three holdings, Kirkland Lake Gold Ltd. (4.91%), Yamana Gold Inc. (4.28%) and Gold Fields Ltd. (4.24%), all saw an increase in market value.

The remaining gold equity ETFs saw unanimously positive total returns in 2017, with the largest being the Global X Gold Explorers ETF at 12.6% and PowerShares Global Gold & Precious Metals Portfolio at 11.8%.