PDAC: ETFs cause exploration underfunding

Massive investment flows into metals exchange-traded funds (ETFs) over the past two decades are the main reason miners are struggling to raise capital, an analyst told the world’s biggest mining conference.

Global metal and mining ETF assets rose about 6% in the first two months of 2025 to $352 billion, new data from the Mineral Fund Advisory research firm show. This follows a 13% jump in assets in 2024 as investors poured money into gold metal ETFs. Physical gold ETFs make up about 70% of metal and mining ETF assets globally.

Funding shortfalls for mineral exploration have become a major issue just as demand for commodities tied to the energy transition is soaring. Data from the Toronto Stock Exchange and the TSX Venture Exchange, which are home to about 40% of the world’s publicly traded miners, show that new equity investment in Canadian mining stocks has fallen significantly since before the pandemic.

“ETFs have sucked a ton of money out of every other part of the business,” Mineral Fund President Christopher Berlet said Tuesday in a presentation at the Prospectors & Developers Association of Canada annual convention in Toronto. “Billions of dollars have gone to ETFs at the expense of managed funds and exploration companies. What does that mean? Less exploration, less investment in the equity markets and undervaluation of mining equities.”

Since mining and metals ETFs first appeared in 2004, an average of one new fund has been created globally every month, Mineral Fund data show.

An ETF is an investment fund that owns multiple assets and can be bought and sold on an exchange like an individual stock. ETFs can track the price of a commodity or a collection of shares.

Metal ETFs dominate

Most physical metal ETFs posted gains in 2024, Mineral Fund data show. Silver ETFs led the way, rising 43%, while platinum funds added 40% and gold ETFs climbed 20%. Base metals ETFs fell 8%.

With combined assets of $296 billion, physical metal ETFs now represent about 84% of the mining and metal ETF investment pool, the data show. This compares with $43 billion for mining equity funds and about $12.5 billion for hedged and leveraged metals funds.

Physical metal ETF assets now dwarf even the world’s largest mining companies. Gold ETFs hold combined assets of $260 billion, more than five times the $49 billion market capitalization of Newmont (TSX: NEM), the biggest gold miner.

“Up until 2004, Newmont was the game,” said Berlet, who’s been studying funds for more than a decade. “Then ETFs came and now all the money has gone into ETFs.”

Juniors bear the brunt

The shift toward ETFs has been particularly detrimental to junior miners, which have historically counted on mutual funds for financing via private placements.

“It’s so easy to buy an ETF,” Berlet said. “It’s way easier than doing the due diligence on a company and doing a private placement. This has had a dramatic impact on the market.”

Investor appetite for ETFs also hugely affects the broader economy through inflationary pressures.

“If you buy nickel in an ETF, it goes into a warehouse,” Berlet said. “You’re adding to demand. You’re competing for that metal with a battery company that needs nickel for its batteries. You’re driving prices up.”

Cheap explorer shares

A silver lining in the surging popularity of physical metal ETFs is the possibility it creates for investors to pick up shares of explorers on the cheap, Berlet said.

Exploration “is where the market opportunity is today,” Berlet said. “The undervaluation of companies against the price of gold is as dramatic today as it has been in the history of the ETF market.”

This valuation gap is one of the reasons Toronto-based asset manager Sprott launched its Active Gold & Silver Miners ETF last month.

With gold and silver mining stocks having lagged the recent run-up in commodity prices, miners offer significant return potential because they have historically outperformed physical metal prices, Sprott says.

“Our expectation over the longer term is that we will see a reversion to the mean and that equities will outperform gold,” Steve Schoffstall, director of ETF product management at Sprott, said in a recent interview. “Earnings of gold (miners) have been projected to increase, and we haven’t seen the equity prices keep up with that.”

“There’s the potential for a catch-up trade.”