Thursday 18 August 2011
Gold miners’ diminishing return on asset (ROA) could indicate flagging demand for the precious metal.
Gold miners’ diminishing return on asset (ROA) could indicate flagging demand for the precious metal.
It really struck me when I saw the rank of the Market Vectors Gold Miners ETF (GDX) dropped an unprecedented 10 points in one week in late April. The rank came from our ETF ranking system that has predictive power to tell which ETF is likely to outperform or underperform the market.
Indeed, our recommendations (click here and here) based on the ranking system delivered better returns than did the S&P 500. Initially I thought the sharp drop was some sort of data error. But three months later the rank still stuck at the same level. Even worse, now the rank is 15 points below its peak. As we will explain later, a 15-point drop means a big chunk of investment return will evaporate.
For a brief understanding of our ranking system please read “ETF Ranking: A New Fundamental Approach That Drives Short-Term Return". In short, the ranking system is based on valuation, financial condition, and return on capital. We observed that stocks with higher ranks had a strong tendency to outperform those with lower ranks over a period of one week.
The data show that moving up 10 rank points translates to an extra annualized return of 1.7% in the past 10 years, if ranks range from 0 to 100. Therefore GDX’s 15-point drop translates to a loss of an annualized 2.6% (1.7% x 15 / 10 = 2.6%). 2.6% may not sound like a big deal, but the S&P 500 Index returned an annualized 2.5% in the past 10 years. So 2.6% is really more than the market return.
It really struck me when I saw the rank of the Market Vectors Gold Miners ETF (GDX) dropped an unprecedented 10 points in one week in late April. The rank came from our ETF ranking system that has predictive power to tell which ETF is likely to outperform or underperform the market.
Indeed, our recommendations (click here and here) based on the ranking system delivered better returns than did the S&P 500. Initially I thought the sharp drop was some sort of data error. But three months later the rank still stuck at the same level. Even worse, now the rank is 15 points below its peak. As we will explain later, a 15-point drop means a big chunk of investment return will evaporate.
For a brief understanding of our ranking system please read “ETF Ranking: A New Fundamental Approach That Drives Short-Term Return". In short, the ranking system is based on valuation, financial condition, and return on capital. We observed that stocks with higher ranks had a strong tendency to outperform those with lower ranks over a period of one week.
The data show that moving up 10 rank points translates to an extra annualized return of 1.7% in the past 10 years, if ranks range from 0 to 100. Therefore GDX’s 15-point drop translates to a loss of an annualized 2.6% (1.7% x 15 / 10 = 2.6%). 2.6% may not sound like a big deal, but the S&P 500 Index returned an annualized 2.5% in the past 10 years. So 2.6% is really more than the market return.
