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Mining for Gold With ETFs or Mutual Funds

For investors with inflation fears or who are seeking safety, these two type of investment vehicles offer separate advantages.
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There's more than one way to invest in gold miners, and

Fidelity Select Gold

(FSAGX) - Get Fidelity Select Gold Portfolio Report


Market Vectors Gold Miners Index

(GDX) - Get VanEck Gold Miners ETF Report

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.

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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) - Get Newmont Corporation Report


Barrick Gold



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Kincross Gold

(KGC) - Get Kinross Gold Corporation Report


Agnico-Eagle Mines

(AEM) - Get Agnico Eagle Mines Limited Report


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.

At the time of publication, Dion was long GDX and FSAGX.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.