Van Eck Debuts Junior Gold Miners ETF

by on November 11, 2009 | ETFs Mentioned:

Gold bullion remains one of the most popular and effective safe havens for investors, generally performing well in uncertain economic environments. And while physically-backed gold products, such as GLD and SGOL, remain the vehicle of choice for obtaining exposure to the yellow metal, innovation in the ETF industry has presented investors with multiple options (see this guide to gold ETFs for a complete rundown). One option that has been particularly popular is the Market Vectors Gold Miners ETF (GDX), a fund from Van Eck that tracks the NYSE Arca Gold Miners Index, investing in the stocks of companies engaged in the mining of gold. In recent months, GDX has effectively served as a leveraged investment on gold prices, generally delivering an amplified return on changes in spot bullion prices.GDX Has Served As A Leveraged Play On Gold

Van Eck is planning to launch the Market Vectors Junior Gold Miners ETF (GDXJ) on Wednesday, introducing a new ETF option for investors looking to gain exposure to the gold mining industry. GDXJ will invest in equities of small and mid cap companies engaged in the development of new sources of gold either through greenfields exploration or the use of new geological models to search for gold in overlooked and abandoned areas.

Junior gold miners generally have a market capitalization of less than $1.5 billion and production levels of less than 300,000 ounces per year. Operations of junior miners cover a wide range, including companies that operate small scale mines and are engaged in defining gold or silver orebodies through drilling. Because many junior miners are yet to establish their ability to consistently generate revenues, they can be very risky investments. For example, Silver Standard Resources, which accounts for almost 7% of GDXJ holdings, is a development stage company that has accumulated a portfolio of silver projects.

Company GDXJ Weighting LTM Revenue LTM Net Income
Coeur d’Alene Mines Corporation 7.1% $205 million $18.3 million
Silver Standard Resources 6.7% $0 ($32 million)
New Gold Inc. 5.9% $304 million ($315 million)
Hecla Mining 4.8% $244 million ($15 million)
Source: Yahoo! Finance

Despite the similar names, GDX and GDXJ offer very different risk and return profiles. GDX is dominated by holdings in large cap companies that generally have more established operations that the companies composing GDXJ. More than 70% of the index underlying the junior miners ETF consists of micro cap and small cap companies, with the remainder allocated to mid cap companies with a market capitalization between $1 billion and $5 billion. For investors, junior gold miners are similar in some respects to an investment in venture capital: many are at an early stage in their life cycle, offering significant risk with the potential for huge growth.

So GDXJ is exposed to some interesting risk factors. This ETF invests in gold mining companies, making it a potentially attractive to gold bugs or investors seeking out safe havens, but also maintains exposure to development stage companies without stable earnings capacity.

Some Similarities

While GDX and GDXJ are exposed to very different risk factors, there are several similarities between the two gold miner ETFs, particularly with regards to geographic exposure. Both invest heavily in Canadian companies, with moderate exposure to South Africa, Australia, and the U.S.

Underlying Index Constituents 31 38
Large Cap Allocation 77% 0%
Canada Allocation 61% 63%
U.S. Allocation 12% 22%
Expense Ratio 0.55% 0.60%

For more reading on the prospects for junior gold miners, see Van Eck’s “The Investment Case for Junior Gold Miners” (PDF)

Disclosure: No positions at time of writing.