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Since Bernanke’s testimony in the most recent Congressional hearing, it has been a tough road for gold. The yellow metal, which is a favorite among both inflation hawks and those looking to protect against economic turmoil, has dropped off of its three month high just below $1,800/oz. and is now sitting well below $1,700, closer to the $1,670 level. This downturn in a little over a week represents a nearly 6.3% loss for gold, erasing much of the gains that investors saw in the entire month of February (read Precious Metal ETFs Slump On Bernanke Testimony).

Beyond Bernanke’s testimony, recent trends in the U.S. dollar have also added to gold’s woes in this time period. The U.S. dollar index now seems poised to break through the $80 barrier, a level the benchmark hasn’t seen since mid January, while Treasury bonds are also seeing declining yields as more investors flow into this safe haven. If this continues and the dollar remains strong, it could diminish the appeal of precious metals, at least in the short term.

Thanks to this, precious metal ETFs have also seen a rough stretch as major gold tracking ETFs—such as (GLD - ETF report), (IAU - ETF report), and (SGOL - ETF report)—are all down in the time period too, pretty much matching the yellow metal’s performance over the past week. Yet, this performance seems downright bullish when investors compare it to the status of the gold mining ETFs in the market (read Three Best Gold ETFs).

These ETFs have all outpaced gold bullion on the downside, with some losing more than 10% in just the past five days. By far the worst performing of the bunch has been the Market Vectors Junior Gold Miners ETF (GDXJ - ETF report) which has lost 12.3% in the time period. This performance is far worse than either of the thinly traded products in the space, Global X’s Pure Gold Miners ETF (GGGG - ETF report) or the new iShares MSCI Global Gold Miners Fund (RING - ETF report) which fell by about 10.2% and 9.5%, respectively, in comparison. It also is handily worse than the top dog in the gold mining space, the Market Vectors Gold Miners ETF (GDX - ETF report) which declined by ‘just’ 8.6% in the same period.

What Happened to GDXJ?

The huge underperformance by this ETF in this very short time period is certainly not from a lack of volume and thin trading. The product has over $2.2 billion in AUM and sees trading of roughly 3.4 million shares a day. This suggests that bid ask spreads are pretty tight and that extra costs that can stem from this factor have not played a role in the fund’s underperformance. Instead, the product looks to be suffering from the more volatile nature of its underlying holdings (see Time To Consider The Small Cap Oil ETF).

The ETF tracks an index of small and mid cap companies in the gold or silver mining industry, holding 82 securities in total. Small caps consist of about 68% of the fund while mid caps comprise the rest of the product, giving it a weighted average market cap below $1 billion. Additionally it should be noted that the fund only has 8.3% of its assets in the U.S. with close to 85% going to Canada and Australia instead, meaning that the product has a heavy international focus.

Meanwhile, the large cap counterpart, GDX, has a few key differences which have saved it from some of the volatility that investors have seen in GDXJ. First, while GDX has heavy exposure to international securities, it still has a 15% holding in American firms and another 62% in Canada. While this might sound similar, the key difference comes from the currency exposure side of the holdings. Pretty much all of GDX holds securities that are denominated in American dollars while GDXJ has just 14% of its portfolio in dollar securities. Thanks to this focus when the dollar is surging, as well as the more stable nature of large cap securities, GDXJ has significantly underperformed GDX in the short term (read Top Three Precious Metal Mining ETFs).

However, with that being said, that does not mean that GDXJ is always destined to underperform its large cap counterpart. In fact, from a year-to-date look, GDXJ has actually outgained GDX by a decent margin and was, until recently, outperforming gold bullion ETFs as well. Instead, investors need to assume that GDXJ is likely to be a far riskier play on the gold mining space than its large cap counterpart thanks to its focus on pint sized securities and its significant holdings of foreign currency assets. When demand is surging for gold and the dollar is slumping, it could be a great time to try GDXJ for exposure to the space. Otherwise, a more traditional look could be warranted, especially if investors are looking to cut down on volatility during this shaky time.

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Disclosure: long IAU and gold bullion.

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