A Few ‘Miner’ Problems
Another wide spread theme in 2013 has been the decimation of gold and silver mining companies.
The MarketVectors Gold Miners ETF (GDX) and its close cousin the MarketVectors Junior Gold Miner ETF (GDXJ) have fallen 54% and 61% respectively this year. I have been warning all year that these companies were in for some severe headwinds as gold bullion prices have fallen to levels that make mining less profitable. Many investors have already fled this sector, but I would not be surprised to see further downside as institutional traders liquidate these holdings as a tax loss strategy or to clean up their portfolios before year-end.
Ultimately we may see a rebound in mining stocks similar to the resurgence of solar stocks this year. However, that may take time to develop as commodity prices stabilize and the Fed continues to massage its monetary policy in 2014. There are still many headwinds that GDX and GDXJ will have to overcome and that will lead to continued volatility. I would be hesitant to re-enter this sector until we see it surge back above its 200-day moving average on strong volume.
Get Rid Of That Lump In Your Stocking
The world is changing and our sources of energy are continuing to evolve towards green alternatives. That may be one of the primary reasons why the MarketVectors Coal ETF (KOL) has performed so poorly this year. This ETF contains 24 global companies who derive at least 50% of their revenue from the coal industry. KOL has lost more than 20% of its value in 2013 and has been in a persistent downtrend for the last three years.
In my opinion, this ETF is focused on a niche energy industry that is in decline and should not have a place in your portfolio. I would instead sell the position and diversify to a more broad energy ETF such as the iShares Global Energy ETF (IXC). That way you get exposure to a much larger group of companies that are engaged in the exploration and production of energy around the world.
The Bottom Line
Each of these ETFs that I have recommended selling will ultimately go through periods of prosperity at some point in their future. However, the lesson here is that by using a sell discipline you are not susceptible to these types of losses and there are better opportunities for your hard earned capital elsewhere.
There are often times better alternatives to achieve a similar objective within the same style of investment sector. By staying vigilant and active you will be able to avoid these problem areas going forward.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. To get more investor insights from FMD Capital, visit their blog.