To fund the buying of the new index additions, the existing index components will likely face steep selling. The Scotiabank report says that GDXJ "could have to sell $2.6B across existing index constituents," which represents "2.5% to 8% of the total shares outstanding of each existing index constituent."
Given the large amount of selling anticipated in its current holdings, GDXJ dropped notably on Thursday even as gold prices climbed to a five-month high. The ETF fell by 3.5%, compared to a 1% gain for spot gold and a 0.1% loss for the larger VanEck Vectors Gold Miners ETF (GDX).
Growing Market Cap
The changes to GDXJ and its underlying index are a reflection of the constraints faced by a large, rapidly growing ETF that invests in a relatively small, niche area of the market. For the time being, the broadening of the index will help the ETF remain sufficiently diversified, even if new money continues to pour into the fund.
However, the downside of the changes is that GDXJ has moved up the scale in terms of market cap, reducing the exposure it offers to the smallest junior gold miners. If the fund continues to grow and again faces issues with concentrated positions, it may have to broaden the index once more.
As Scotiabank points out, the GDXJ universe was first expanded in December 2014, when the ETF faced similar problems. The broadening of the index at the time increased the ETF's market-cap range from $95 million - $448 million to $95 million - $995 million.
Contact Sumit Roy at [email protected]