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
click to enlarge

“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.”

 

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When the billionaires invest in gold should you do too?

Readers’ attention is drawn to my latest article published on Seeking Alpha:   Billionaires, Gold And Gold Stocks… They Are In For The Long Term, Should You Be Too?  In it I look at what the latest highly-publicised news of some huge investments in gold and gold stocks by some of the USA’s wealthiest elite means in terms of investment guidance for the individual investor.  Obviously this news only comes to light some time after these big investments have been made – and big gains will already have been made.  Is it too late to join them?

But, as a general rule – there are exceptions of course – these mega-investors are looking to the medium to longer term appreciation of their assets.  They have invested because they see the signs that the prospects for precious metals appreciation over the next months and years is positive, and for precious metals stocks perhaps even more so.  There have been huge gains in gold mining majors’ stock prices for example so far this year – a table from the article is appended below showing some of these, the gold price itself and, for comparison, one of the most followed gold stock indices (the XAU) and a junior precious metals stocks ETF (GDXJ):

Company

Price December 31st Current Price – May 30th 2016 Peak to date % below peak % rise since Dec 31st
Barrick Gold

7.38

16.62 19.37 14.2 125.2

Newmont

17.99

31.96 35.55 10.1

77.7

Goldcorp

11.56 16.60 20.15 17.6

43.5

Kinross

1.82

4.23 5.70 25.8

132.4

XAU

45.3

79.41 92.85 14.5

75.3

GDXJ

19.21

32.89 39.20 16.1

71.2

Gold Price 1061.30 1208.36 1292.98 6.5

13.9

 

While the recent slump in the gold price has meant prices have come back from their highs, all are hugely still in positive territory and the recent pullback may well present a great buying opportunity – particularly if you are convinced that the gold price has further to rise in the months and years ahead.

Gold majors comfortably outperformed basket of juniors in gold price rise

It is interesting to note that major gold mining stocks for the most part have more than comfortably outperformed a basket of gold mining juniors like the GDXJ gold ETF.  Barrick Gold (ABX) in particular performed spectacularly up 90%,  this somewhat contrary to normal theory which might suggest that juniors comfortably outperform gold majors at a time of rising gold prices.

My view is that the main reason for the spectacular performances of some (most) of the majors is rebuilding of gold stock positions by funds which had virtually sold out of gold stocks over the prior three years.  they just didn’t want to be left behind in the recent gold price surge.  It is also apparent that in a time of rising gold prices, gold mining stocks hugely outperform the metal itself and its proxies like the gold ETFs.

To read more of my analysis on this click on GDXJ And The Gold Mining Majors – Where To Now? which is published on the Seeking Alpha website.

Scary 2016 ahead, Russia adds gold, SGE withdrawals etc. – and Season’s Greetings

Firstly my compliments of the season to all reader’s of lawrieongold.com, which I have now been publishing for almost exactly one year – and which has achieved just short of 100,000 page views over the period.  Thanks for following.

Here are some pointers to articles I have published on Sharpspixley.com – one of the best aggregators of precious metals news and comment available – in the past few days:

Scary year ahead. Should we be buying gold and silver:  Portents for 2016, according to a number of well-respected observers – are beginning to look decidedly scary. Will this turn the investment sector back into buying gold and silver?

Russia adds another 21.8 t gold and 46t more drawn out of China’s SGEThe Russian central bank has been continuing its gold buying spree increasing its holdings by around 22 tonnes, while China’s SGE sees physical gold continuing to be withdrawn at a strong level

And one you may not have seen, published on Seekingalpha.com pointing to the potential of an investment in the GDXJ if gold and silver do make something of a recovery in 2016: GDXJ- Limited Downside And Great Upside Potential In A Rising Gold And Silver Price Scenario