Earlier this week, ETF.com reported that the VanEck Vectors Junior Gold Miners ETF (GDXJ) may have become too big for its index, the MVIS Global Junior Gold Miners Index. The $5.4 billion exchange-traded fund owns giant positions in its underlying holdings, putting it at risk of violating certain Canadian and U.S. regulatory thresholds.
To avoid crossing those thresholds, the ETF bought up stocks of companies that aren't in its index―creating a significant divergence between the ETF components and the index components. On Thursday, VanEck (which runs both the ETF and index) acknowledged the divergence by announcing it would broaden the scope of the index and include many more gold miner stocks in the portfolio at the next rebalance date.
Dramatic Transformation For GDXJ
According to a press release from the firm, starting on June 17, "companies ranking between 60% and 98% (currently: between 80% and 98%) of the full market capitalization [of the investable gold miner universe] qualify for inclusion in the MVIS Global Junior Gold Miners Index."
Translated into market-capitalization terms, that means the market-cap range for new index components may expand from $75 million - $1.6 billion to $75 million - $2.9 billion, according to a Scotiabank report published on Thursday.
The changes to the index will result in a dramatic transformation of GDXJ's portfolio. Scotiabank estimates that, after the changes, there could be 23 new additions to the index (four of which are already in the ETF). Those 23 new additions could represent 60.8% of the new index portfolio.
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]