GDXJ Junior Gold Miner ETF: The Devil is in the Details

There has been a lot of investor interest in Van Eck Global’s Market Vectors Junior Gold Miners ETF (GDXJ) but the question is: will it live up to those lofty expectations? Words: 868

In further edited excerpts from the original article* Jeff Nielson (www.bullionbullscanada.com) goes on to say:

The GDXJ consists of 37 gold miners and prospectors with a weighted average market capitalization of only $850 million and a minimum cap of $150 million. The top 10 holdings, representing 46% in total, at its launch are:

Coeur d’Alene Mines (CDE), 6.6%
New Gold (NGD), 5.6%
Silver Standard Resources (SSRI), 5.4%
Hecla Mining (HL), 5.2%
Gammon Gold (GRS), 4.7%
Alamos Gold (AGI), 4.3%
Semafo (SMF.CN), 3.8%
Silvercorp Metals (SVM), 3.7%
European Goldfields (EGU), 3.4%
Golden Star Resources (GSS), 3.34%

Geographically, the portfolio is heavily tilted towarded Canadian-based companies at 62.6% with the U.S. and Australia far behind.

Here are some short-comings of the ETF:

1. Many Top-quality Gold Juniors do NOT Qualify for this Fund
The fund is not allowed to invest in any “junior” with a market cap of less than $150 million, with $200 million being the normal threshold. As such, thanks to the slaughter which these companies were subjected to in 2008/2009, dozens of top-quality gold juniors do not qualify for this fund – and this limits the selection available to the fund, although there are still many companies to choose from.

2. The Fund Invests in Mid-cap, NOT Small-cap Gold Miners
Also, contrary to the name of the fund, the fund will invest in mid-cap gold miners – with market caps in excess of $500 million. While there are some quality companies in this group, as well (with strong growth profiles), the inclusion of these larger companies will tend to reduce the up-side for this fund below what it would have been had the fund focused only on the small-caps.

3. Losses Can Exceed 100% of the Amount Invested
The “small print” in the prospectus also gives potential investors in this fund a good reason for worry: the intention of the fund to invest in “derivative” investments. This category of investments is described as “swaps, options, warrants, futures contracts, and currency forwards”. The prospectus warns that investments in these instruments could result in losses exceeding 100% of the amount invested!

4. Fund Overly Exposed to Derivatives
It gets worse. The fund intends to have at least 80% of its capital invested in the core assets around which the fund is based. However, this does not mean it will have at least 80% of those dollars invested in the shares of these companies. The company stated that these “derivatives” would be considered part of the core assets of this fund (meaning part of that 80% core). This means that theoretically the fund could hold 0% mining shares, and all derivative instruments. Obviously that is an extremely unlikely scenario. The point, however is that there is no possible excuse for deviating into these especially risky assets.

In Conclusion:
Apparently the people managing this fund don’t think that they can achieve a high enough return through investing in mining equities alone. This certainly suggests that this fund lacks the expertise to identify the best growth “stories” – and so wants to be able to attempt to “juice” returns through the same, Wall Street, Ponzi-like investments which have caused most of the problems in financial markets.

I had previously expressed personal interest in buying into this fund – as a relatively “safe” and diversified investment (within this sector). However, should the fund managers choose to invest heavily into derivative investments, the actual holdings of mining equities could be limited, and thus not offer an amount of diversification to justify experienced investors into putting money in this fund – and certainly the “safety” I had hoped for is also not present.

I would rather pick my own stocks one at a time, since I have no intention/desire to invest in the types of risky instruments in which this fund intends to dabble. I wish that I could be more enthusiastic in recommending this fund to investors.

“The devil is in the details,” goes the cliché – and certainly the managers of this fund have chosen to “make a deal with the devil.” People investing in precious metals are generally doing so to escape from the dubious (and often fraudulent) “exotic” financial products invented by the devious minds of Wall Street.

It would appear that this point is simply not understood by Van Eck. While the fund managers could choose to risk few of their investor dollars in derivative instruments, the fact that they will not commit themselves to more specific (and more responsible) guidelines for how and where they invest those dollars means that I have to reluctantly “pass” on investing in this fund.

For those investors who do buy in, I certainly wish you luck. However, I also advise you to keep a close watch on exactly what assets are held in this fund. Should the actual holdings in mining company shares not come very close to the 80% “core” in this fund, I would urge investors to seek other options for their precious metals investments.

*http://seekingalpha.com/article/172870-van-eck-s-new-junior-gold-miner-etf-a-preliminary-analysis

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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