GDXJ Upside Bests GDX

Gold miners’ exchange-traded funds are surging with gold powering higher. These mounting gains are naturally fueling growing interest in the leading gold-stock investment vehicles. Traders looking to deploy capital are wondering which major gold-stock ETF is superior, offering the best balance between upside potential, component fundamentals, and risks. GDXJ takes the crown, besting its larger big brother GDX.

By my count, there are currently 14 gold miners ETFs trading in US markets. But that’s not authoritative, as the broader ETF industry is constantly in flux. These gold-stock ETFs collectively held $17.5b in net assets as of the middle of this week. And two major ETFs utterly dominated, commanding fully 85.1% of all those gold-stock investments! They are of course GDX and GDXJ, which dwarf everything else in this sector.

The GDX VanEck Vectors Gold Miners ETF and GDXJ VanEck Vectors Junior Gold Miners ETF hold net assets of $10.6b and $4.4b, or 60.2% and 24.9% of American gold-stock ETFs’ total. They have a huge and likely-insurmountable first movers’ advantage, being birthed way back in May 2006 and November 2009 respectively. They’ve gradually built great brand recognition, even being viewed as primary sector indexes.

When hedge funds report their equity holdings every quarter, if they have any gold-stock exposure GDX or GDXJ often top those lists. When gold miners are discussed on CNBC, GDX and to a lesser extent GDXJ are used in charts as sector benchmarks. VanEck’s popular pair of leading gold-miners ETFs are well-known to investors and speculators interested in this sector. They are effectively the only game in town.

With one company managing both GDX and GDXJ, and actively marketing them as a “Gold Miners ETF” and a “Junior Gold Miners ETF”, you’d think they are as different as their names imply. But unfortunately that’s not really the case. GDX and GDXJ hold many of the same component gold miners, with massive overlap in their holdings. And GDXJ’s definitely aren’t junior gold stocks, but actually larger mid-tier gold miners.

I’ve researched and written extensively on this. Every quarter I wade through the latest results from the top 34 component stocks of both GDX and GDXJ. The latest-available data is still Q3’18’s, as the full-year reports including Q4 aren’t due until 60 to 75 days after year-end depending on companies’ market capitalizations. As the recent Q3 earnings season wrapped up, GDXJ’s components were a subset of GDX’s.

GDXJ’s top 34 stocks accounted for 82.9% of its total weighting. And fully 31 of these components were also GDX components. These common gold miners across both ETFs weighed in at a massive 79.2% of GDXJ’s total weighting, and 31.7% of GDX’s. So nearly 4/5ths of this “Junior Gold Miners ETF” is made up by nearly 1/3rd of the major “Gold Miners ETF”. GDXJ is now a mid-tier gold miners ETF, not a junior one!

It wasn’t always this way, with GDXJ staying true to its advertised mission in its early years. But GDXJ became a victim of its own success in the first half of 2016. A young gold bull fueled skyrocketing gold-stock prices as traders flooded in to chase their rallies. GDXJ quickly grew so large that it risked running afoul of Canadian securities laws, where most of the world’s smaller gold miners’ and explorers’ stocks trade.

In the Canadian stock exchanges which are the center of the junior-gold universe, an antiquated rule severely hobbles ETFs. Once any investor including ETFs acquires a 20%+ stake in any Canadian stock, it is legally deemed a takeover offer that must be extended to all shareholders! American stock-market capital flooding into GDXJ in early 2016 pushed many of its Canadian-junior ownership percentages near 20%.

Obviously hundreds of thousands of investors buying ETF shares have no intention of taking over gold-mining companies, no matter how big their collective stakes. That’s a totally-different scenario than a single corporate investor buying 20%+. Instead of lobbying Canadian regulators to exempt ETFs, GDXJ’s managers chose to unilaterally redefine what junior gold miners are. Stakes in Canadian juniors were slashed.

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