Mining for Gold With ETFs or Mutual Funds

There's more than one way to invest in gold miners, and Fidelity Select Gold(FSAGX) and Market Vectors Gold Miners Index(GDX) have both risen in popularity as investors seek safety and inflation fears abound. While gold miner stocks can be twice as volatile as gold prices, investors have been willing to brave the risk/reward scenario for the potential upside in 2009. Year-to-date, GDX is up 20.43% and FSAGX is up 19.98% as of June 10.

FSAGX and GDX both invest assets in companies that are primarily engaged in the exploration, mining, processing and dealing of gold. While FSAGX has more holdings than GDX, the funds share many of the same components, including Newmont Mining(NEM), Barrick Gold(ABX) and Goldcorp(GG), Kincross Gold(KGC) and Agnico-Eagle Mines(AEM).

Choosing an ETF over a mutual fund or vice versa usually comes down to a question of personal preference. ETFs have gained a tremendous amount of popularity in recent years due to their transparent structure and low fees. GDX has an expense ratio of 0.55% while FSAGX has a low expense ratio of 0.85%. The similarities between the two funds are striking, but some investors prefer a human with an active trading strategy at the helm rather than an index. The larger number of holdings in FSAGX also means a smaller concentration of assets in top holdings, reducing the exposure that investors have to any one portfolio component.

One set back to FSAGX is the required holding period after an initial investment. FSAGX shareholders have to hold shares of the fund for longer than 30 days in to avoid a 0.75% redemption fee -- a nerve-racking setback for nervous investors who prefer the option of getting in and out of investments quickly.

As opposed to the once-a-day pricing method of mutual funds, ETFs like GDX trade continuously throughout the trading day, but this flexibility also brings an increased measure of volatility. This volatility can be unsettling at times, however, when news releases bully a fund around during the trading day, setting off a chain of nervous trading.

ETF or mutual fund? It depends on how long you're planning to hold it. If you are seeking a short term investment in outperforming gold miners, stick with lower-fee GDX so you can get in and out quickly if the tide turns. If you are buying for the long haul, however, it may be best to stick with FSAGX to spread your risk out and avoid the top-heavy structure of GDX.

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