Can Too Much Money Go Into One ETF? GDXJ and GDX Probs Explained

By Frank Holmes – CEO and Chief Investment Officer US Global Investors

When billions of dollars flow into an ETF, it’s safe to assume this is because of its popularity among investors. The VanEck Vectors Junior Gold Miners ETF (GDXJ), which invests heavily in junior gold miners around the world, can attest to this kind of popularity, with some $1.5 billion flowing into it this year alone. Total assets jumped 60 percent in 2017 to over $5 billion.

lumber logs a 12 year high

At some point, however, as is the case with the GDXJ, asset growth can outpace an ETF’s underlying index. As BMO Capital Markets reported in mid-April, there will be a massive rebalance trade around the GDXJ on June 17, with changes already taking place. The index methodology is now permitting larger companies to be added, with significant demand for around 18 potential new additions, in conjunction with down-weighting of existing names.

The new index methodology allows the ETF’s largest company by market cap to be $2.9 billion, versus $1.8 billion under the current method, reports Investor’s Business Daily. This puts it over the traditional $2.5 billion limit for small caps.

Impacts of the “Pre-Balance”

So what will the “pre-balance” and official rebalance in June mean for investors? For starters, it may mean less exposure to small-cap names. As I told Kitco News, this is a disruptor for small-cap gold stocks, which are getting knocked down for no reason when they have great fundamentals.

In addition, the ETF will need to sell $3 billion worth of its existing holdings to buy the new large-cap additions, which will create a massive funding trade significantly impacting existing names, BMO continues.

The number of companies the GDXJ can invest in starting in June will go from 48 to 69.

Sifting and Sorting For Opportunity

Since the GDXJ methodology update was announced, Macquarie Research reported last week that both the GDXJ and the VanEck Vectors Gold Miners ETF (GDX) have recorded large redemptions. Since April 13, the GDXJ has gone from $5.5 billion to $4.1 billion, losing approximately 25 percent of its assets. Similarly, the GDX went from $12.4 billion to $10.1 billion since the news – a drop of 19 percent.

lumber logs a 12 year high
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“Indiscriminate selling pressure has been placed on the sector due to redefining the index methodology not based on the fundamentals of companies,” explains portfolio manager Ralph Aldis. The investment universes of both the GDX and the GDXJ are defined by market cap and liquidity and designed like many ETFs are, to deliver beta but not alpha.

“There are no smart beta attributes to these ETFs, meaning we find a lot of high quality names are being indiscriminately sold down,” Aldis continues. “This may provide an excellent entry point for astute investors to pick up small-cap, high-quality growth names.”

 

Elliott Wave analysis: Gold and silver now in major long term uptrend

Peter Goodburn of Elliott Wave analysts, Wavetrack International, comments on the latest breakthrough in the dollar gold price as signifying the end of major counter trend declines in gold and silver.  Base metals such as copper are also due for a similar take-off.

Time necessitates this most urgent update of mining stock performance of the last few trading days. Last Friday’s punch higher for many of the mining ETFs, indices and equites broke key overhead resistance levels that now confirms the November/December ’14 lows as the finalising levels of the multi-year counter-trend declines that began from the 2008/09 and 2011 highs. This also confirms gold and silver bullion have also ended major counter-trend declines that began from the highs in year-2011 at the Nov/Dec.’14 lows of 1131.85 and 14.51 respectively.

Last year’s forecasts had projected the GDX down to 15.90 with the Nov.’14 low recording just a fraction higher at 16.45 – see fig #1.

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The XAU was forecast down to 60.60 with the Nov.’14 low ending again, slightly higher at 61.39 – see fig #2.

02_XAU Gold_Silver Index 150118

Various gold and silver miners, for example, Newmont Mining was forecast lower, towards 18.07 with the mid-December ’14 low recording a low at 17.60 – many other equities being tracked in our portfolio are also confirming a major directional change has occurred, confirming a new multi-year bull market uptrend has begun.

Gold bullion is still in its early stages of upward development and although we expect an upside test towards the old but key resistance level of 1525.00+/- in the months ahead, there is some shorter-term resistance overhead now that prices have today traded above 1300.00+/-. See fig #3.

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Silver was already confirmed as ending its entire counter-trend decline that began from 49.91 last December at 14.51, the morning after the Swiss referendum result. But recent action has distilled this bullish forecast with the early stages of a multi-year uptrend underway with forecasts into new record highs – see fig #4.


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Meanwhile, Copper made headline news last week with prices plunging into a new 5-year low, but in doing so, key downside levels forecast last year have now been tested towards 5575 (US$ tonne) with a little room to do a fraction more towards 5090 if needed. But the key message here is that base metals are hot on the tracks of the precious metals sector in confirming a reversal of trend – see fig #5.

05_Cu3m150118

We conclude with one of the major industrial/base metals mining companies, BHP-Billiton – see fig #6. Throughout last year, we had forecast a large percentage decline for this equity based upon the ongoing development of a counter-trend zig zag pattern that was pulling prices lower from the April ’11 high of 2653.50. Prices were hit during the last several months, dropping by over -40% per cent from the July ’14 reaction high. A low traded last week at 1247.50 and by every account, slightly above idealised measurements to 1201.50 – despite this however, the following action is confirming a major low at 1247.50 has formed, ending the entire pattern from April ’11 and validating our bullish forecast for a new bull market uptrend in its early stages of development.

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For more details, please contact Wavetrack International at services@wavetrack.com or send a message using the ‘Help-Desk’ at the top of www.wavetrack.com