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Gold Miner ETF GDXJ to Undergo Dramatic Change

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VanEck Vectors Junior Gold Miners ETF (GDXJ - Free Report) has reportedly “become too big for its index”, the MVIS Global Junior Gold Miners Index. Assets in this fund grew to $5.3 billion from approximately $1 billion in early 2016. The fund has garnered $1.42 billion in the year-to-date time frame. Moreover, the rebound in the price of gold led GDXJ to reach $36.14 on April 17, 2017 from $19.80 at the start of 2016 (read: Are Gold ETFs Gearing Up for a Rally?).

The ETF, to avoid crossing regulatory thresholds, bought significant positions in holdings that are not a part of the index. These holdings, comprising 25% of the fund’s assets, have the biggest weightage in the fund. Some of these have a weighted average market cap well above the stated investment objective . VanEck Vectors Gold Miners ETF (GDX - Free Report) for example, with a 5.07% allocation, has a weighted average market cap of $9.3 billion, thus marking a diversion from the investment objective.

VanEck acknowledged this issue and said that it will realign the index portfolio on the next rebalance date by including more gold miner stocks, thus broadening the scope of the portfolio.

The proposed rebalancing will have a dramatic effect on the ETF’s portfolio. There will be multiple additions to the index, which will constitute a major percentage of the portfolio. Scotiabank estimates that there will be 23 new additions that will constitute over 60% of the new index portfolio (read: Gold ETFs Tussle Between Geopolitics and Fed).

The fund will see dramatic offloading of current index components to fund the new additions. Scotiabank estimates that the fund could have to sell $2.6 billion of fund assets, representing approximately 2.5-8% of each individual existing component.

Owing to the expected selling in the fund, GDXJ dropped considerably on Thursday, April 13, 2017, down about 3.5% to close at $36.7. It fell further on Monday, April 17, 2017, to close at $36.14.

Let us now take a look at the characteristics of the fund.

VanEck Vectors Junior Gold Miners ETF is an attractive option to gain exposure to this precious metal without having to hold the physical commodity or going through the hassles of futures-based strategies. It seeks to track the performance of micro and small-cap companies in the junior gold mining industry. However, it has recently swayed away from that objective.

It has AUM of $5.3 billion and charges a fee of 56 basis points a year. The fund has top holdings in Alamos Gold Inc (AGI - Free Report) , Vaneck Vectors Gold Miners ETF (GDX - Free Report) , and B2 Gold Corp (BTG - Free Report) with 6.06%, 5.07%, and 4.87% allocation, respectively. From a geographical perspective, the fund has top holdings in Canada, Australia, and United States, with 63.54%, 11.42%, and 10.64% allocation, respectively. The fund returned 14.55% in the year-to-date time frame and 3.20% in the past one year (as of April 17, 2017).  

To Conclude

The changing market cap is a cause for concern for investors targeting the small-cap spectrum specifically. Though the near-term rebalancing is expected to be a bit costly, it is unlikely to impact the fund’s long-term trading potential. Moreover, GDXJ is a highly liquid fund trading in an average volume of 22.27 million shares a day. A one-time marginal increase in the fund’s capitalization exposure is not expected to increase volatility and affect the fund’s performance.

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