Today the $950 million Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG) resumed creations. Roughly 10 days ago, Direxion abruptly froze creations for JNUG “due to was the limited availability of certain investments or financial instruments used to provide requisite exposure to the MVIS Global Junior Gold Miners Index," according to a press release from the firm.
Redemptions were unaffected.
JNUG’s index also underlies the $4.8 billion VanEck Vectors Junior Gold Miners ETF (GDXJ). It covers smaller gold miners, and after the fund saw $3.3 billion flood into the it since the start of 2016, GDXJ ended up owning significant portions of its underlying holdings. This presented issues regarding the IRS’ diversification rules and Canada’s rules regarding ownership percentages, and the fund was forced to invest in securities not included in its own index.
Index Construction Change
As a result, VanEck announced—on the same day JNUG halted creations—that it would be changing the construction of the index to include an additional 23 firms. GDXJ will begin tracking the revised index as of June 17.
Although JNUG does not invest directly in the components of its underlying index, it does have large positions in GDXJ shares and swaps. At the time of the suspension of creations, JNUG’s positions in GDXJ shares and swaps were equal to more than 63% of GDXJ’s AUM.
When it suspended creations for JNUG, Direxion likely anticipated difficulties in achieving its target exposures with the potential for GDXJ to fail to track its underlying index closely looming large. However, VanEck’s announcement of the solution to its own problem appears to have solved Direxion’s problem with JNUG, and creations have been resumed.
Contact Heather Bell at [email protected].