What Is Going On With The GDXJ: One Explanation

Tyler Durden's picture

Authored by Sumit Roy via ETF.com,

Can an exchange-traded fund get too big for its index? That's the question investors in one popular gold miner ETF are grappling with after rapid asset growth pushed it to significantly deviate from its underlying index.

The ETF in question is the VanEck Junior Gold Miners ETF (GDXJ), which tracks the MVIS Global Junior Gold Miners Index. Since early 2016, assets in the fund ballooned from a little more than $1 billion to $5.4 billion currently. Some of that was due to rising share prices?GDXJ nearly doubled from $19.80 at the start of 2016 to $36.71 today, an 85% gain, thanks to the rebound in gold.

But a lot of it had to do with the enormous amount of new money that came into the fund. Since Jan. 1, 2016, inflows into the ETF have totaled $3.3 billion. For almost any ETF, that's a big amount, but especially for one that targets a relatively niche area like junior gold miners.

GDXJ Assets Under Management

Source: Bloomberg

Giant Stakes In Underlying Holdings

The ETF has gotten so big that it now owns giant stakes in its underlying holdings, three-quarters of which are Canadian companies. According to an analysis by Scotiabank, there are 10 Canadian companies that the ETF owns where its ownership percentage is more than 18%.

For six of those companies, the percentage would be even greater, but presumably, the fund doesn't want to exceed the 20% level, which, under Canadian rules, would force the ETF "to automatically extend a takeover offer to all remaining shareholders at the same terms," according to a Scotiabank report.

The ETF has also struggled to abide by U.S. IRS diversification requirements. "GDXJ has intermittently been in jeopardy of losing its preferential tax treatment (as a regulated investment company) since last September because its portfolio often doesn’t comply with the diversification requirements of the U.S. Internal Revenue Code," noted Scotiabank.

ETF Deviating From Index

In an attempt to try to ameliorate the concentration issues it’s facing, the ETF now has five holdings that aren't index constituents, representing 25% of GDXJ's portfolio, according to BMO Capital Markets. One of those holdings is the VanEck Vectors Gold Miners ETF (GDX), another product from the same issuer, which focuses on much larger gold companies.

Chris Kwan, mining specialist at BMO, believes GDXJ has simply gotten too big for its benchmark now that it is a $5 billion ETF "attempting to invest in a ~$30B gold universe."

In Kwan's view, there are three ways forward for the ETF. It could continue with the status quo, creating uncertain and volatile quarterly rebalances; it could sell its nonindex gold stocks and increase its position in GDX; or it could expand the allowable market-cap size of the ETF.

Moving Beyond Junior Gold Miner Territory

In a way, the ETF has already de facto expanded the average size of its holdings. The nonindex names that it owns have the biggest weightings in the fund. That includes GDX, which has a weighted average market cap of $9.3 billion?well beyond small-cap, junior miner territory.

Perhaps the easiest fix for VanEck, which also develops the underlying index for GDXJ, is to expand what it considers to be the junior gold miner universe, something the issuer did in 2014 when faced with a similar situation. Why hasn't this happened already? That may be because the portfolio managers are holding out hope that, at some point, they can go back to employing a full replication strategy.

As Scotiabank points out, if VanEck expands the universe too much, the market cap for some of the holdings in the ETF would breach $2.5 billion, a level often used to define small-cap stocks. That's not necessarily a horrible thing, but it would take the ETF further away from offering the junior gold miner exposure that it promises.

VanEck wouldn't comment on its portfolio management decisions for this story, but said that "it continues to manage GDXJ so it meets its investment objective" even though "there may be times when certain market and regulatory factors affect the ability of GDXJ to own certain securities or own them in proportion to their index weightings."

JNUG Tail Wagging The GDXJ Dog

Of course, if asset growth for GDXJ remains strong, the issuer may have little choice but to broaden the scope of the ETF. What's interesting is that much of GDXJ's recent (and perhaps future) growth has come from an unlikely source: the Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG).

Analysts at Scotiabank believe that most of the growth in GDXJ was due to inflows into JNUG, which offers 3x leveraged exposure to the same underlying index as GDXJ. Since early last year, JNUG has seen its assets rise from $100 million to more than $1 billion currently.

The analysts pointed out that according to the latest daily holdings report from JNUG, "nearly 53% of GDXJ’s shares outstanding could be held as hedges against swaps that underlie the 3x levered product."

That's an interesting twist in this saga if JNUG is the tail that’s wagging the GDXJ dog.

Bottom Line

For investors, the bottom line is that the holdings of their favorite junior gold miner ETF have gotten a little bit bigger on the market-cap spectrum. It's not necessarily a huge deal, but for those aggressive investors looking for targeted exposure to the smallest, most volatile gold miners, perhaps that's something that turns them off from the fund and compels them to look elsewhere.

On the other hand, GDXJ is by far the most liquid and tradable name in the junior gold miner space, and a marginal increase in its weighted average market cap isn't going to noticeably change the volatility of the fund or the exposure it offers.

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LawsofPhysics's picture


don't overthink this you stupid fuck. When fraud is the status quo, possession is the ONLY "law".

VD's picture

i own quite a few shares of this etf. it will go parabolic.

eclectic syncretist's picture

There are hundreds of junior minor that GDXJ and JNUG could invest in if their customers are willing to put forth the funds. This situation, this article, are complete bullshit to cover up something.

FrozenGoodz's picture

JNUG the pig that keeps getting slaughtered

asteroids's picture

Holy crap Batman. Leverage on top of leverage. Imagine what happens to the downside. A massive flashcrash. Both ETFs will lose huge amounts of value in seconds. Nobody gets out alive.

giovanni_f's picture

Simple: GS and the rest of the binge fapping slum lord untouchables / pedofile wallstreet scum continues to  povide naked short issuance by this keeping a lid on the gold junior stock sector. No way to locate the outstanding virtual shares AT ALL - they have to be sold to vanish. What happens now is just the visible part of a restructuring scheme running in the background before the SHTF.

Avoid any ETF - go with dividend paying royalty companies with management that has a track record of success before trying to outsmart the PDAC insiders.

Just google "scum steve cohen overstock" to find out in case you have no idea that stocks can be multiplied by GS at will by this inflicting huge damage on the companies and their shareholders and the productive economy.

Herd Redirection Committee's picture

Amazing how large amounts of cash flowing into gold investment hardly affects the price of gold!  I am sure everything is above board...  The Financial Masters of the Universe don't mind keeping it at 'for sale' prices as long as that means increased credibility for the PRODUCT they offer (which is cash and credit).  And when it (POG) does finally rocket higher, like a balloon that has been held underwater for YEARS, I am sure they will blame 'gold bugs' and hoarders, instead of their own policies...

Nah, they wouldn't do that, would they?

ParkAveFlasher's picture

Actually I believe the author either implies that the thing will bust first, or is weighing down the price of its underlying components second (due to excessive inertia in ETF position relative to what would be unfettered price movements in the underlying assets), or third: both.

Bottom line is that if you do not perfom diligent research and want quick and dirty investments for day trading (like ETFs) you deserve to get your dick caught in the meat slicer.  No sympathy for you.  Chances are TBTF uses the ETF to sit on the miners (disclosure: I'm full in actual junior miner stocks).

VD's picture

so how much of your dick got sliced already?

ParkAveFlasher's picture

Precisely none, I'm actually IN junior miners.


TheLastTrump's picture

There's a 4/1 reverse split due in less then 2 weeks FYI, May 1st I believe. Same with JDST.


You're going have 75% less shares, soon.

Hongcha's picture

These issues are 3x leveraged, very popular.  It's nothing more than a table at a casino. 

Too many players?  Get more dealers, decks, chairs, chips.  BFD.

Btw, Au and the miner shares are holding up well today after that $3b notional dump and the disappointment that we haven't started ww3 (yes, it's that sick, don't shoot the mailman!). 

Hal n back's picture

it is amazing that SNAP, NFLX FB AMZN and many other companies have zero problem by getting overvalued becasue mutua fund companies and hedge fund own then and just when the long term hoders of junior miners start getting excited about money coming into the sector, ther are rules to keep that from happening.

We can lets all thos companies get noseblled valutions but its wring to see jr miners get that.

or for than t matter gold and silver, physical, themselves.

face it, the fix is in and we cannot fight city hall.

ParkAveFlasher's picture

The fix is in until it isn't.

Consuelo's picture



 I wish there was a handy cartoon caption which showed somebody rubbing his hands together in a drooling state over how rich he's gonna get once the POG really takes off, only to find that all his new found wealth (in paper) won't buy him shit.

Hongcha's picture

Yes.  Au, Ag and Pb are what you want in-hand, in the final analysis!

Muad'Grumps's picture

I've never understood this retardery. If gold is $3000 and the HUI is 1500, my gold bought today has tripled, but my gold shares are up 7 fold plus. 

What's the difference if one sells their gold for currency versus gold shares for currency?

Are you a FOFOAtard?

Herd Redirection Committee's picture

Only makes sense if the market is illiquid/inaccessible, you are not allowed to withdraw from your investment account, or mines get nationalized when the POG (inevitably) doubles or quadruples.

NoDebt's picture

I'm going to start an ETF that invests in nothing but ETFs.


omi's picture

Hush... You've just became part of an elite fund of funds circle. Keep it quiet.

pupton's picture

So is this ETF underperforming the index, as depicted here?  As a holder of GDXJ, maybe this crowded trade needs to be let go...

TradingTroll's picture

New lows on the horizon for junior PM miners. Stock market will take them down. These ETF problems don't help.

actionjacksonbrownie's picture

It's pretty simple, and the story alludes to it: the fund stopped investing in it's target market last June, and is either investing in other underperforming assets, or is sitting in cash because it can't legally invest any more into the junior miners.

She's dead, Jim.

Goldbugger's picture

I love doing the old in and out on JNUG. I see an early retirement in my future.

Catullus's picture

Just let it trade at a premium to NAV.

Or buy the underlying commodity.

slightlyskeptical's picture

Share creation should have been cut off long ago.

Since it wasn't, any appreciation in it's holdings will require share sales to stay below the 20% threshhold, pretty much putting a cpa on this sector..

mosfet's picture

Yep JNUG is the tail wagging this dog - More so at the moment.  Currently Direxion has suspended new share creation of JNUG but left JDST unlimited.  This is bullish for JNUG but means there's a finite number of shares available to go Long GDXJ and and infinite number of shares available to Short it.  So you have a positive bias to the upside for JNUG and a negative bias to the downside for GDXJ.

It's only day 2 of the share suspension but my guess is that the disparity between JNUG, JDST and GDXJ will grow to the point where you could see both JNUG & JDST up at the same time by several percent, even with GDXJ down.  This is a temporary condition and I'm extremely bullish on GDXJ and SIL for the long-term when the SHTF in markets.

If no market correction occurs between now and 2nd week of May after Le Penn loses the final round (as expected), then look to pick up GDXJ at a bargain during the week before the June 14th Fed rate hike meeting; after Gold's been knocked down to low or sub $1200/oz again.

TheLastTrump's picture

WARNING >>> There's a 4/1 reverse split due in less then 2 weeks FYI, May 1st I believe. Same with JDST.

Richard640's picture

FROM blogger "Silverand Gold"=

If you have half a brain this article should clue you in as to who and what is responsible for the lack of PM share performance. If you are trading or investing in the ETF’s you are cutting your own throats and everybody else’s too. Now just ONE ETF is worth $5 Billion and the shares have gone virtually nowhere. Are you getting the picture?? Who owns the ETF’s?? The very banks and institutions who are suppressing the PM shares. WAKE UP PEOPLE!! You are being had!! Your own investments are being used by them to suppress the PM’s……..and this article is designed to drive you out of PM’s entirely by making you think the ETF’s actually own the underlying shares. THEY DON’T!! They only TRACK  the value of the underlying shares and in fact may be shorting the very same shares to suppress them. That means, in this case, they have a $5.4 billion slush fund to use to control every little move while they continue to use your investment against you. If you still cannot see it then I give up because you must be Einstein’s definition of insane, doing the same thing over and over again and expecting different results. Please wake up!!


ParkAveFlasher's picture

+10,000...I failed to express the situation this eloquently above.


Sudden Debt's picture

look like it's time to dump them, pitty...

Quinvarius's picture

They have no choice but to suspend new share creation.  And that means bullish action.  Other ETFs have been in the same boat for various reasons.  

TheLastTrump's picture

There's a 4/1 reverse split due in less then 2 weeks FYI, May 1st I believe. Same with JDST.



Clock Crasher's picture

JNUG +1,400% trough to peak 2016

Do the maffs

TheLastTrump's picture

WARNING- There's a 4/1 reverse split due in less then 2 weeks FYI, May 1st I believe. Same with JDST.

uno's picture

managers should use the excess cash to buy physical COMEX delivery gold bars, cut them up in grams sizes, and distribute them as dividends to shareholders. This supports the junior miners, keeps the demand up in GDXJ and gets rid of the excess cash.