Alternatives To Changing Gold Miner ETFs

April 20, 2017

Less than two months from now, the VanEck Vectors Junior Gold Miners ETF (GDXJ) will witness a dramatic transformation in which more than half of its portfolio will comprise stocks that aren't currently in the fund.

Due to index rule changes that go into effect on June 17, the market-cap range for new entrants into the ETF may expand from $75 million - $1.6 billion to $75 million - $2.9 billion, according to estimates from Scotiabank, allowing almost two dozen new stocks into the fund.

That's quite a change. It also tilts GDXJ toward midcap territory and away from small-cap territory. There's nothing wrong with that per se, especially since there's no set definition for what "junior gold miners" are.

Chris Thompson, mining analyst at Raymond James, considers junior miners as companies that produce less than 250,000 ounces of metal per year―criteria that's separate from market cap.

In any case, some investors may be turned off by the soon-to-be larger-cap tilt of GDXJ. It may not be by much, but a focus on somewhat larger companies may translate into slightly less volatility for the ETF. Volatility-seeking investors’ choices are to stick with the updated ETF or consider competing products.

Smaller GDXJ Rivals

For those looking for alternatives, there are two options, both of which are much smaller and less liquid than the $5 billion GDXJ. One is the Sprott Junior Gold Miners ETF (SGDJ), with $57 million in assets under management. SGDJ owns small-cap gold companies with market capitalizations between $250 million and $2 billion.

Unlike GDXJ, which is market-cap-weighted, SGDJ weights its holdings based on two factors―revenue growth and price momentum. Also unlike GDXJ, it excludes mining companies with market caps below $250 million. It does this "to favor junior and intermediate producers versus early-stage exploration companies whose historical success rate is low," according to the issuer website.

The other competing ETF is the $47 million Global X Gold Explorers ETF (GOEX), a market-cap-weighted fund that's recently seen a significant index change of its own. Prior to December, GOEX exclusively held stocks of gold explorers, which are preproduction gold companies. However, a challenging market environment for explorers prompted Solactive, the index provider, to replace the old index with a new one that's broader in scope.

 

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