Rethinking Gold Miner ETFs

November 19, 2009

 

It's my guess that more than anything else, this exposure to Australia has had and will continue to have a profound effect on the performance difference between the two ETFs. Take a look at the two-month chart, using the GDXJ index (MVGDXJ) as a proxy for GDXJ (since the fund only started trading last week):

 

 GDXJ index (MVGDXJ) as proxy for GDXJ

 

That red line at the bottom is the slow and steady rise of the Australian dollar over the past two months, as represented by the CurrencyShares Australian Dollar Trust (NYSE Arca: FXA). This currency effect implies that even if the market had remained entirely flat, the U.S. dollar value of the Australian holdings inside GDXJ's benchmark index would still be some 8 percent higher than they were two months ago. Given the continued run in gold and gold stocks, that currency effect simply adds extra juice.

The flip side, of course, is that if and when the infamous "cheap dollar carry trade" we keep reading so much about starts unwinding and the dollar begins to strengthen, GDXJ's exposure to the Australian dollar could become a hindrance, rather than a help.

 

Do We Need A Better GDX?

In the end, I'm struck by one thing: diversification. I like that GDXJ doesn't concentrate so heavily in only a few names like GDX does, and instead reaches further down into the junior miners. But I hate the redundancy; to me, it just feels sloppy. For my money, GDXJ appears to be the better indexing mousetrap, as it reaches internationally for relevant companies regardless of exchange, sensibly weights them and caps any overexposure.

Wouldn't it be nice if GDX did something similar, ditching the NYSE Index and investing in the nonoverlapping 90 percent of the market that GDXJ ignores, using GDXJ's methodology?

In the meantime, GDXJ—or its index, at least—seems to be about as solid a pick-and-shovel ETF play as you can get.

 

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