The index change that affected the VanEck Vectors Junior Gold Miners ETF (GDXJ) earlier this year was a huge story. Analysts at TD Securities went as far as to describe it as the "single greatest wealth destruction event in index history," which sounds a bit extreme, but encapsulates how big a deal the event was for gold mining equities.
In the two-month lead-up to the June 17 event, investors braced themselves for a deluge of selling in certain gold miner stocks and buying in others when the ETF instituted its dramatic rebalancing.
Some investors tried to front-run, or get ahead of GDXJ's moves, while others waited on the sidelines, hoping to pick up the pieces when all was said and done.
Fast-forward to today, and the GDXJ rebalance may not have been the great wealth destroyer it was billed to be, but there's no denying it's changed the world's largest junior gold miner ETF profoundly.
Since the index change went into effect on June 17, the $4.5 billion fund saw its total number of holdings increase by nearly 50% to 73, with the new constituents now accounting for a larger share of the fund than the old ones.
According to Credit Suisse, the average market cap of the new stocks in the ETF's portfolio was three times that of the old stocks, representing a notable shift up in the size composition of the fund.
Today VanEck says GDXJ has a weighted-average market capitalization of $1.8 billion, compared with $969 million at the start of the year. The price of the fund increased by 7.6% in that time frame.
Global Vs Canadian-Focused
GDXJ's transformation into a gold miner ETF with a larger tilt may already have impacted returns for the fund. Since the rebalancing, the fund is only up 2.9%, well below the 10.8% return for the competing $177 million Sprott Junior Gold Miners ETF (SGDJ).
YTD Returns For GDXJ, SGDJ
For comparison, last year, GDXJ returned 72.9% versus 68.2% for SGDJ. On the surface, it looks like the GDXJ index change may be driving its recent underperformance, but is that really the case?
According to Brandon Rakszawski, product manager at VanEck, the answer is no.
"GDXJ is a global product," he said. "Other gold-mining products may be more North American and Canadian-focused."
About 56% of GDXJ's holdings are Canadian stocks, compared with more than 81% for SGDJ, Bloomberg data show.
"Canada has been a very strong performing segment of the gold mining industry," Rakszawski explained. A lot of the performance difference between the funds "has to do with those types of exposures."
Factors Driving Returns
Of course, not everyone is convinced the recent divergence in performance between GDXJ and other junior gold-mining ETFs can simply be attributed to geographic exposure.
John Ciampaglia, CEO and senior managing director at Sprott Asset Management, says most of the outperformance in SGDJ comes from smart stock selection.
"The market-cap screen kept us smaller-cap, but the factors generated the bulk of the alpha," he said.
SGDJ currently has a weighted average market cap of $1.7 billion, according to FactSet, only slightly smaller than the rival GDXJ, but it has a substantially different weighting methodology.
While GDXJ is market-cap-weighted, SGDJ is weighted based on factors such as revenue and momentum.
"No set of factors will work at all times, but intuitively, we think these factors make sense for junior gold mining stocks," Ciampaglia remarked.
Debate Rages On
After the index change, questions linger: Is GDXJ the best ETF option in the junior gold mining space? Is it even a junior gold mining ETF at all? These are topics that will continue to be debated.
"If you look at the No. 1 holding in GDXJ, it's Gold Fields," Sprott's Ciampaglia pointed out. "That's a stock that you would hardly call a junior gold stock―it's a company that's been around for decades. In terms of the spirit of what a junior company is, we think we've got a more pure form of providing that exposure to the market space because our market-cap limit is much lower."
On the other hand, VanEck's Rakszawski believes the VanEck fund is still very much a junior gold-miner ETF because its weighted average market cap is only $1.8 billion, well below the $9.1 billion level for the broader VanEck Vectors Gold Miners ETF (GDX), which is heavily weighted toward large-caps.
"When it comes to junior gold miners―if you’re looking for the broadest exposure to that space—GDXJ is still the best benchmark for that given its global positioning," countered Rakszawski.
Looking Under The Hood
SGDJ limits its holdings to stocks with market caps between $250 million and $2 billion. GDXJ holds companies ranking between 60% and 98% of the full market cap of the gold-miner universe.
Currently, GDXJ's top-holding Gold Fields has a market cap of $3.4 billion, while SGDJ's top holding of Iamgold has a market cap of $2.8 billion.
Those are the facts; investors can make of them what they will. But if there's one thing all the commotion about gold-miner indices did this year, it's open investors' eyes to what's hiding behind the hood of their favorite ETF, and that's a great thing.
Contact Sumit Roy at [email protected]