Here's a warning for investors who believe they have the Midas touch: Not all gold ETFs are guaranteed to shine.

Van Eck's Market Vectors Gold Miners ETF ( GDX) had traded on the American Stock Exchange for only one session last month when the World Gold Council reported some seemingly great news. Gold investment demand through ETFs jumped 59% in the first quarter of 2006 from a year earlier, the council's data showed.

For gold investors, the news wasn't particularly surprising, given that the returns on the market-dominant gold ETF, the streetTRACKS Gold Shares ( GLD), were up 25% for the year as of May 23, the date of the WGC's release. The other main ETF linked to gold, the iShares Comex Gold ( IAU), was up in a similar amount. Meanwhile, the money managers at New York-based Van Eck, seeking to capitalize on the success of streetTRACKS Gold Shares, had launched the Market Vectors Gold Miners ETF in hopes that investors would find the miners as enticing as the metal.

The new mining ETF is up about 2.4% from its first day of trading May 22, while gold prices have fallen about 1.6% amid a widespread commodities downturn. But some observers say that Van Eck's new baby doesn't have what it takes to achieve the type of longer-term success exhibited by the streetTRACKS Gold Shares.

George Milling-Stanley, the WGC's manager of investor and market intelligence, sees higher gold prices down the road, but he remains skeptical about how well the gold miners ETF will fare, given the competition from other investment strategies.

"What investors in Van Eck's vehicle are offered is a new and easier way to do something that they could already do, rather than something that they couldn't do," he says. In other words, investors already have had access to gold-mining shares through mutual funds or through purchasing the stock directly.

In contrast, the streetTRACKS Gold Shares opened the bullion market to investors who had previously been locked out through high transaction costs. Direct purchases of gold bars typically require buyers to pay storage and insurance costs, which investors then need to cover with an additional outlay of cash. And unlike investments in stocks, gold doesn't yield any dividends or interest, which might be used to cover the charges.

The elimination of the added hassle by streetTRACKS has clearly attracted investors. So far the GLD, which launched in November 2004 after a big push by the WGC to increase investment interest, has claimed $7 billion of investor funds, the overwhelming lion's share of the gold ETF investment pool. Meanwhile, investments in the Comex Gold have totaled more than $800 million.

What the Van Eck Gold Miners ETF does offer investors is a single-stop shop to pick up a basket of the 43 companies included on the Amex Gold Miners Index ( GDM). Newmont Mining ( NEM), Barrick Gold ( ABX) and AngloGold Ashanti ( AU) are the top three holdings and comprise 30% of the index. The smallest company featured in terms of market cap is Vancouver-based exploration company Entrée Gold ( EGI), which boasts properties in the Gobi region of Mongolia.

Many of these stocks have gotten big lifts in the recent gold surge. But Robert Conroy, professor of finance at the Darden Graduate School of Business at the University of Virginia, isn't enthusiastic about the idea of combining them into an ETF. "What's the huge advantage vs. the individual stocks?" he asks. "I don't see the transactions/costs arguments," referring to the oft-cited advantage of ETFs over mutual funds.

Because ETFs typically track indices, there is no need to employ active managers to pick individual stocks. Thus, an ETF should theoretically be able to operate with lower costs and that should result in a lower expense ratio for investors. That's the amount that the fund managers take of each dollar invested. Van Eck's Gold Miners has an expense ratio of 0.55%, or 55 cents for each hundred dollars invested for a year.

But that theory of lower expense doesn't seem to keep up with the reality. Morningstar mutual fund analyst Karen Wallace says the average expense ratio for precious-metals mutual funds is 1.39% -- but there are a few mutual funds that compete with the ETF in terms of the costs. The lowest is the ( VGPMX) Vanguard Precious-Metals and Mining fund, which has an expense ratio of just 0.4%. It's closed to new investors. ( BGEIX) American Century's Global Gold fund comes in second, sporting an expense of 0.67%, which compares favorably to Van Eck's. Neither fund has a sales charge, and both have the added benefit of active management.

Ronald DeLegge, editor of the Web site ETFGuide.com, isn't so harsh on Van Eck's efforts. He notes the index has a beta of 2.15 based on historical data, which means that for every 1% change in the price of gold, Van Eck's Gold Miners moves more than 2%. That increased volatility could benefit more experienced investors who may take advantage of advanced trading strategies.

DeLegge suggests a strategy of writing covered out-of-the-money call options could yield extra income for existing holders of the ETF. "For traders that are involved in options, volatility means higher option premiums and high premiums mean more income," he says. These trading options aren't available for mutual funds.

He also believes that the miner ETF provides institutional investors the chance to reduce their workload researching individual stocks. "Their only concern at that point is to be correct about the sector," he says.

Van Eck's gold strategist, Joe Foster, points out that the high beta gives added leverage for investors seeking assets uncorrelated with the broader stock market. "Another way of thinking of it is, similar exposure to metal with only half the investment," he says.

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