Alternatives To Changing Gold Miner ETFs

Less than two months from now, the VanEck Vectors Junior Gold Miners ETF (GDXJ) will witness a dramatic transformation in which more than half of its portfolio will comprise stocks that aren't currently in the fund.

Due to index rule changes that go into effect on June 17, the market-cap range for new entrants into the ETF may expand from $75 million - $1.6 billion to $75 million - $2.9 billion, according to estimates from Scotiabank, allowing almost two dozen new stocks into the fund.

That's quite a change. It also tilts GDXJ toward midcap territory and away from small-cap territory. There's nothing wrong with that per se, especially since there's no set definition for what "junior gold miners" are.

Chris Thompson, mining analyst at Raymond James, considers junior miners as companies that produce less than 250,000 ounces of metal per year―criteria that's separate from market cap.

In any case, some investors may be turned off by the soon-to-be larger-cap tilt of GDXJ. It may not be by much, but a focus on somewhat larger companies may translate into slightly less volatility for the ETF. Volatility-seeking investors’ choices are to stick with the updated ETF or consider competing products.

Smaller GDXJ Rivals

For those looking for alternatives, there are two options, both of which are much smaller and less liquid than the $5 billion GDXJ. One is the Sprott Junior Gold Miners ETF (SGDJ), with $57 million in assets under management. SGDJ owns small-cap gold companies with market capitalizations between $250 million and $2 billion.

Unlike GDXJ, which is market-cap-weighted, SGDJ weights its holdings based on two factors―revenue growth and price momentum. Also unlike GDXJ, it excludes mining companies with market caps below $250 million. It does this "to favor junior and intermediate producers versus early-stage exploration companies whose historical success rate is low," according to the issuer website.

The other competing ETF is the $47 million Global X Gold Explorers ETF (GOEX), a market-cap-weighted fund that's recently seen a significant index change of its own. Prior to December, GOEX exclusively held stocks of gold explorers, which are preproduction gold companies. However, a challenging market environment for explorers prompted Solactive, the index provider, to replace the old index with a new one that's broader in scope.

Today GOEX is transitioning to an index of gold companies involved in exploration and limited levels of gold mine production. New constituents must have a market cap of at least $200 million. The largest holding currently has a market cap of $2.4 billion.

In terms of performance, GOEX is at the head of the pack in terms of year-to-date returns, with a gain of 15%, compared with 13.7% for GDXJ and 11% for SGDJ. Of course, past performance is no guarantee of future results, especially with all the index changes taking place.

YTD Returns For GDXJ, SGDJ, GOEX

Alternatives To Broken JNUG

Meanwhile, GDXJ isn't the only ETF that's facing the scrutiny of investors. Last week, creations for the Direxion Daily Gold Miners Index Bull 3x Shares (JNUG) were suspended indefinitely, raising concerns that the ETF could trade at a premium to its net asset value (NAV).

Currently, investors are paying more than a 1% premium above NAV to buy JNUG on the open market. For those who want to avoid the ETF until the creation/redemption mechanism is fully restored, there are three leveraged alternatives.

The first is the $2 billion Direxion Daily Gold Miners Index Bull 3x Shares (NUGT), which provides triple-leveraged exposure to the broad NYSE Arca Gold Miners Index (the same index tracked by the VanEck Vectors Gold Miners ETF (GDX). There's also the $14.7 million ProShares Ultra Gold Miners (GDXX), which provides 2x-leveraged exposure to the same NYSE Arca Gold Miners Index.

NUGT and GDXX both track an index that's weighted heavily in large-cap gold mining stocks. For smaller-cap, leveraged exposure, investors can consider the $6 million ProShares Ultra Junior Miners (GDJJ), which provides double the daily return of the MVIS Global Junior Gold Miners Index (the same index tracked by GDXJ and NUGT).

As always, tread carefully when buying and selling thinly traded ETFs, such as those mentioned in this article with less than $100 million in assets.

Contact Sumit Roy at [email protected]