GDXJ’s internal allocations among its various components are
loosely based on market capitalization, which is the best way to structure a
sector ETF. Larger stocks should
have more of an overall portfolio impact than smaller ones. You can see GDXJ’s component
weightings in black above, right next to their actual market-cap percentages
of components’ total market capitalization in gray. These market-cap numbers are all
converted into US dollars from the exchanges on which GDXJ owns its shares.
There are few major deviations between relative market caps and
GDXJ’s allocations, which is great to see. This is a big contrast from GDX the
last time I dug deep into its holdings in late 2007.
Interestingly, the total
native-exchange market cap of all 55 GDXJ components this week was under
$42b. This is nothing, as there
are over 50 individual stocks in
the S&P 500 with larger individual market caps. The junior golds remain a
vanishingly-small and ultra-high-potential sector.
As you can see above not all of this “Junior Gold Miners
ETF” is invested in junior golds.
It actually has significant silver exposure, to some major silver producers no less. Among its top holdings are Hecla
Mining, Coeur d’Alene
Mines, Silver Standard Resources, and Silvercorp. Overall, about 84% of GDXJ’s
components (by this ETF’s allocation weightings) are involved in gold
with the rest in silver.
While this silver dilution irritates some investors, I don’t
have a problem with it. Most
gold-stock investors like silver stocks as well. And silver is actually a fairly-common
byproduct in primary gold operations anyway, so plenty of gold miners produce
silver as well (and vice versa).
Most of the time when I use the phrase “gold stocks”, what
I really mean is “precious-metals stocks”. So GDXJ’s silver exposure is
fine, and it should augment this ETF’s ultimate returns if
today’s secular silver bull outperforms gold’s.
More provocatively, about 61% of GDXJ’s allocation is in producers with only 38% being in explorers
(the remainder is a small position in cash). Small producers, those rare juniors
that beat the long odds to actually start mining gold or silver, are much
less risky than exploration-stage companies. Producers actually have something to
sell to generate cash. While some
small producers can be called
juniors, in my mind the real juniors are the explorers that haven’t yet
transformed projects into operating mines.
This relatively-low ratio of explorers in GDXJ is a double-edged
sword. On the bright side, the
lower the explorer exposure the less risk this entire ETF bears for
investors. But in the financial
markets, lower risk always corresponds with lower potential returns. The truly legendary gains in the
junior-gold realm all came from small explorers that eventually grew into
producers. So with such a
minority focus on exploration-stage juniors, GDXJ’s returns will never
come remotely close to rivaling those of successful individual juniors.
Interestingly, by allocation percentage 55% of GDXJ’s holdings
are held on Canadian stock exchanges, 32% in the States, and the rest
scattered in Australia, Hong Kong, and London. Thus GDXJ offers American investors a
unique opportunity to get exposure in gold juniors that they couldn’t
buy here in the States with an ordinary brokerage account. Most US accounts are only enabled for
US-listed stocks.
For serious gold-stock investors, the ability to trade outside of the
US is nothing special. Because of
onerous financial regulations here in the States, well under 10% of the
junior gold stocks listing in North America have primary US listings. 90%+ list in Canada, so most serious
gold-stock investors take the time to open a US brokerage account with direct
access to the Canadian exchanges.
But for casual American investors looking for some quick junior
exposure, GDXJ offers excellent international diversification.
This being said, GDXJ’s international allocation is not truly as
high as this table indicates.
Why? There are some GDXJ
components this ETF owns on Canadian exchanges that also have major-market
listings here in the US. For
example, GDXJ’s top holding is New Gold at 4.8% of its capital. Though GDXJ’s custodians hold it
in Canada, you can easily buy it on the AMEX as well. A sizable fraction of GDXJ’s
“Canada” exposure could easily be replicated by buying the US
AMEX listings of the very same
companies. So realize
GDXJ’s international exposure is effectively lower than advertised.
GDXJ’s custodians are probably not trying to mislead American
investors though. In some cases,
companies with dual US and Canada listings do more trading volume in
Canada. And as an ETF with
relatively-large holdings in these companies, it is prudent for GDXJ to hold
any particular stock wherever it is most liquid and easiest to trade. Regardless, GDXJ still provides
American investors with excellent exposure to many awesome Canadian juniors
that don’t have major-market
listings in the US.
GDXJ’s benefits for investors and speculators are very
clear. It provides a quick and
easy way for anyone to get instant diversified exposure to a broad array of
gold juniors. It eliminates the
difficulties of researching and constructing one’s own junior portfolio
and really lowers transaction costs (one commission instead of dozens). It creates a great basket in which to
ride gold uplegs, and since GDXJ is fully optionable speculators can now
easily actively leverage junior golds’ uplegs and corrections.
But GDXJ’s impacts extend far beyond investor ease. It is going to radically change the
underlying junior landscape itself.
Remember that junior-gold explorers have no source of revenue, so they
rely on the capital markets for cash to stay afloat. The higher their stock prices, the
easier it is for them to issue shares and raise cash. When GDXJ buys any junior stock,
naturally this buying pressure drives it a little higher. Thus any junior fortunate enough to
make the GDXJ component list will have an easier time raising capital,
increasing its odds of proving successful.
And the larger GDXJ grows, the more this effect will multiply. Today GDXJ’s net assets are a
relatively-small $920m or so. As
more investors learn of GDXJ and its power to efficiently add diversified
junior-gold exposure to their portfolios, they will buy it and its assets
will grow. As GDXJ grows, its
capital deployed in junior golds will increase. More capital flowing from investors through this ETF into junior stocks
will drive their stock prices higher.
This not only helps them raise capital on more-favorable terms, it
ignites a positive feedback loop where higher prices drive more investment
which drives higher prices.
Much like the massive GLD gold ETF forever changed gold investing by creating the
first-ever conduit for stock-market capital to flow directly into physical
gold, I suspect GDXJ will ultimately have a similar effect on juniors. Investors who would never take the
time to find great juniors, or could never bear the extreme risks these
individual stocks impose, can now bypass these challenges with a simple GDXJ
allocation. GDXJ is almost
certain to greatly expand the pool of capital invested in this high-risk
high-reward sector.
As a long-time direct speculator in junior gold stocks, GDXJ really
excites me. The more capital
chasing juniors, the higher their stocks will ultimately run. And GDXJ opens a huge new conduit
making this possible, really revolutionizing junior-gold investment. But as a student of the markets, I am
also super-stoked about GDXJ’s value as a tracking vehicle. There has never been an easy way to
track the progress of juniors compared to the broader gold-stock sector as
measured by the HUI gold-stock index.
Over the years we’ve tried various proxies for junior gold
stocks, but none were optimal.
The primary example is the S&P/TSX Venture Composite Index, still known by its CDNX symbol from its original
Canadian Venture Exchange days.
While over 3/4ths of the companies in this index are smaller resource
stocks, less than 2/3rds of these are gold stocks. Thus only about half of the CDNX
index, at best, is comprised of junior gold stocks. This means CDNX charts are riddled
with tons of non-gold noise.
But GDXJ provides a far-superior junior-gold tracking vehicle,
supplanting all the other clumsy attempts to measure juniors as a
sub-sector. As GDXJ’s
trading record grows, we’ll be able to compare its price moves during
major gold-stock uplegs and corrections to the HUI itself’s. So GDXJ is going to evolve into a
wonderful new analytical tool that will greatly expand investors’
knowledge of how junior golds move as a group. I can’t wait to analyze it!
This chart compares the HUI in red, the GDX gold-stock ETF which
mirrors it in light blue, and the new GDXJ junior-gold ETF in blue. Since GDXJ was just born in November,
it has only experienced one major event in gold stocks. This was the HUI’s latest major
correction which ran from early December to early February. During that span where it fell 27.6%,
GDX lost 26.5% and the brand-new GDXJ shed 25.2%. This is far too short of span to draw
conclusions from, but it is all the data we have at this point.
But there is a tantalizing clue that the GDXJ juniors will ultimately
end up tracking gold differently
than the GDX majors. Since the
GDXJ’s inception, it has had a correlation r-square with the HUI of
80.2%. Statistically, 80% of
GDXJ’s daily price action so far has been explainable by the
HUI’s own. Over this same
span, the GDX holding major gold miners had a 99.8% r-square. So effectively 100% of its daily price
action since early November was mathematically explainable by the HUI’s
own.
Thus even in GDXJ’s infancy, its gold juniors are behaving
noticeably differently than their major brethren as expected. The more GDXJ trading data we accrue
to analyze, the better we will understand the trading tendencies of the
junior sub-sector compared to the larger gold-stock sector. This will help optimize buy and sell
timing for juniors specifically, something that was almost impossible without
a consistent measuring stick for juniors as a whole.
At Zeal we brought our subscribers up to speed on GDXJ just after it
was launched. But with gold
stocks so overbought back in late November, and GDXJ having no trading
history, it wasn’t the right time to buy it. But after the HUI’s latest
correction, GDXJ is looking very attractive. We currently have open call-options
positions in it in both our weekly and monthly newsletters. And with
gold stocks under pressure this week, now is a great time to add these or our
extensive other gold-stock positions.
Subscribe today!
Despite the considerable benefits of ETFs, I’ll always prefer
individual stocks. That way we
can hand-pick the highest-potential ones while avoiding the inferior ones
that creep into every ETF. We
just finished a large project where we spent the last several months
painstakingly researching a universe of nearly 400 junior gold stocks that
trade in the US and Canada. We
whittled this list down to our dozen favorite advanced-stage junior golds, elite explorers on the verge of
becoming new gold producers.
We profiled this elite dozen in a comprehensive new fundamental report just
published on our website.
Representing hundreds of hours of world-class research condensed into
26 pages, this is a steal at just $95 ($75 for Zeal subscribers). While 7 of these soon-to-be-famous
junior golds are included in GDXJ today, their combined weight is less than
11% of this ETF. If you pick any
7 of our favorite advanced-stage juniors, your ultimate returns will almost
certainly multiply GDXJ’s many times over. Buy your report today!
The bottom line is the new GDXJ Junior Gold Miners ETF offers
investors a quick and easy way to get diversified
junior-gold exposure. For casual
investors, it eliminates key problems that have long plagued junior-gold
investing. These include the
serious challenge of researching to separate the high-potential junior golds
from the dross, and buying junior golds outside the US where the great
majority of them list. GDXJ also
really reduces transaction costs for a casual diversified junior-gold
deployment.
This investor-friendly junior approach will also radically impact
junior golds themselves. As more
capital floods into this tiny sector via this new GDXJ conduit, junior-gold
stock prices will rise. The
higher their stocks, the easier it is for these companies to raise cash
through equity offerings to advance their projects. By linking juniors to potentially vast
new pools of stock-market capital, GDXJ will revolutionize this sector.
Adam Hamilton, CPA
Zealllc.com
March 26, 2010
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