How An ETF Gets Too Big For Its Index

April 10, 2017

JNUG Tail Wagging The GDXJ Dog

Of course, if asset growth for GDXJ remains strong, the issuer may have little choice but to broaden the scope of the ETF. What's interesting is that much of GDXJ's recent (and perhaps future) growth has come from an unlikely source: the Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG).

Analysts at Scotiabank believe that most of the growth in GDXJ was due to inflows into JNUG, which offers 3x leveraged exposure to the same underlying index as GDXJ. Since early last year, JNUG has seen its assets rise from $100 million to more than $1 billion currently.

The analysts pointed out that according to the latest daily holdings report from JNUG, "nearly 53% of GDXJ’s shares outstanding could be held as hedges against swaps that underlie the 3x levered product."

That's an interesting twist in this saga if JNUG is the tail that’s wagging the GDXJ dog.

Bottom Line

For investors, the bottom line is that the holdings of their favorite junior gold miner ETF have gotten a little bit bigger on the market-cap spectrum. It's not necessarily a huge deal, but for those aggressive investors looking for targeted exposure to the smallest, most volatile gold miners, perhaps that's something that turns them off from the fund and compels them to look elsewhere.

On the other hand, GDXJ is by far the most liquid and tradable name in the junior gold miner space, and a marginal increase in its weighted average market cap isn't going to noticeably change the volatility of the fund or the exposure it offers.

Contact Sumit Roy at [email protected]

 

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