What Happened Since The GDXJ Had Its EPIC Rebalancing?

In the first half of 2017, the GDXJ (VanEck Junior Gold Miners ETF) went through an EPIC rebalancing for junior gold mining stocks, which created a once in a few years opportunity. There was a massive tsunami of capital that flowed into the GDXJ, causing the GDXJ to push up close to the 20% ownership its Canadian listed gold stocks. We are nearing the 1-year anniversary since the epic rebalancing. There were about 18 of these Canadian junior gold mining stocks that GDXJ was close to triggering the takeover intent [1]. This is something an ETF manager does want. What ensued next was an epic sell-off of junior gold mining stocks. The individual gold mining stocks had their holdings significantly reduced in the fund because it needed to reduce ownership interest in these stocks and its new holding rules for new stocks. What does it look like today?

THE AUM CHANGE

When you go through the SEC filings for the GDXJ, you can see how investor sentiment has changed for the GDXJ, even as gold prices are up. The assets under management dropped by 1 billion dollars, as outlined in our chart below. The GDXJ is down 6.44% since January 2017, GLD is up 13.47% [2]. Have investors turned their back on the GDXJ? No, fund flows are up as of February 2, 2018, to the June 30^th filings. The GDXJ continue to provide investors and gold stock analysts the volume necessary (average 11 million shares traded each day over the last 3 months) to consider having it as a component in the portfolio, particularly if they do not want to go through the weeds of identifying winning gold mining stocks.

 

WHAT DOES A SIDE BY SIDE COMPARISON LOOK LIKE?

When we look at the table we built to compare the three months change in the GDXJ holdings; it is more pronounced how the GDXJ dramatically changed over the three-month period. The top 10 holdings are all new mining stocks, and it is both gold mining stocks and silver mining stocks. In fact, the top holding was a silver mining stock, Pan American Silver.

NEW NAMES ADDED TO THE GDXJ

There were winners in the GDXJ rebalance with new names added to the ETF, which weren’t in the portfolio before. When we put together the graph below to see the change in holdings, there were more than 15 new gold and silver mining companies added to the ETF. This change resulted in the holdings going up to 73 by June 30, 2017, up from 57 holdings on March 30, 2017[3]. We should point out; the GDXJ owned GDX (Gold Miner ETF), which resulted in owning a smaller percentage of the larger gold mining stocks in the ETF.

COUNTRY EXPOSURE

What a difference only 9 months makes regarding country allocations for the GDXJ, from March 2017 to December 2017.  Companies from Australia, South Africa, United Kingdom, and the United States all experienced significant increases to the ETF.  Holdings from Canada experienced a significant drop-off in the GDXJ. The GDX ETF has been eliminated, so it allowed other countries to have an increased weighting in the ETF. As you will see in our charts below.

 

LESSONS FROM COUNTRY EXPOSURE

Home country bias happens all the time with investors. They tend to have more investments in the country they live in when most of the world economic activity happens outside of their own country. It can also put investors more exposed to specific sectors because a country does not have a large number of publicly listed companies across multiple industries. Materials and financial services heavily influence the Canadian and Australian stock exchanges. In contrast to the S&P 500, which has broad industry exposure, Newmont Mining is the primary gold mining stock on the S&P 500.

HIDDEN OPPORTUNITIES THAT THE GDXJ NOW OFFERS THE GOLD STOCK ANALYST

Now that the GDXJ holds larger market capitalization gold mining stocks, it creates a HUGE opportunity for gold stock analysts that are willing to roll up their sleeves, just a bit. Developers and up and coming junior mining producers present significant opportunities because the GDXJ will not pick them up now until they are larger in market capitalization. There are some streaming companies as well that are NOT listed on the GDXJ but are fast growers.  Look through the value chain. 

WHAT THE GOLD STOCK ANALYST IS NOT TALKING ABOUT

Is there an opportunity for publicly traded asset managers or brokerage firms, or drillers that could be added to the GDXJ or other gold mining stock ETFs. YES! The reason is simple; they generate a material amount of the revenue from junior gold mining stocks, so why would they not include them? If they are willing to include royalty companies that are generating revenue from gold mining stocks, then why would they not include these other businesses? No one is talking about this opportunity. However, some key players in the junior gold mining sector have the potential to be added to a gold ETF. I am not sure when it will happen, but companies that have direct revenue exposure to the industry should be considered. 

WILL ANOTHER GDXJ RE-BALANCE OCCUR?

If gold were to go up 50%, I think the odds of another rebalance happening with the GDXJ, are probably greater than 75%. The GDXJ has had now had to re-adjust its holdings because of the tsunami of capital flowing in twice now, 2017 and 2014 This is normal, but it is an unspoken risk and more important opportunity to capitalize on ETF’s adding more names into an ETF or picking up names that are getting dumped because of ownership requirements.

JNUG IS THE OUTLIER

JNUG offers triple leverage to junior gold mining stocks. As our chart below outlines, JNUG invests in the GDXJ and Sprott Junior Miners ETF (SGDJ). We will see a rush from traders into JNUG, if gold spikes because the short-term moves can be massive. The Sprott Junior Gold Miners ETF could also be impacted in the next run up because of inflows from JNUG. If you own GDXJ or SGDJ, could be impacted by another re-balance like 2017 the GDXJ rebalance from investor flow because of JNUG buying into your ETF aggressively. We will have to wait and see how JNUG buying into the GDXJ and SGDJ impacts them in the next gold run-up.

WHATS THE TAKE-AWAY?

• The GDXJ is more influenced by mid-tier gold and silver producers now than in March 2017.
• There will be another GDXJ rebalance in the future when gold price swings higher, and SGDJ could be a junior gold mining ETF impacted as well.
• JNUG could impact two junior gold mining ETFs in the next gold run up (SGDJ & GDXJ)
• Know when an ETF reports its annual or semi-annual re-balance before you buy into it because it could impact you.
• Identify winning names that can be added to an index because eventually, they will.
  • Does the company have the potential to turn into a current billion market cap company?
    • If yes, the odds are in favor of it potentially being added to an ETF
• If you have a company in an ETF, it could get its holding sliced in half like a watermelon, with you end up holding the bag.
• Do the holdings inside the ETF accurately match what you are trying to get exposure to. Otherwise, there may be names inside the ETF that may be better or worse to own?
• Look at more than 1 ETF to determine what is the best option for you and compare them to make sure the ETF meets your goals.

We have a saying at First Macro Capital, “Know what is in inside, and Know why you own it”

Source: [1]Zerohedge,[2]Google Finance, [3]Edgar

Disclaimer: