Van Eck's New Junior Gold Miner ETF: A Preliminary Analysis 14 comments
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The long-awaited debut of the Van Eck Market Vectors Junior Gold Miners ETF (GDXJ) finally arrived Wednesday. Anecdotally, there has been a lot of investor-interest in this new fund, as demonstrated by the strong interest and many inquiries I received after first writing about this fund in June (see “New ETF provides access to junior gold/silver miners”). The question is: Will it live up to those lofty expectations?
Looking at the SEC filing, the prospectus contained one piece of information which was disappointing to me, personally, and one aspect that should give investors some pause for concern.
With respect to the “disappointment,” the fund is not allowed to invest in any “junior” with a market cap of less than $150 million, with $200 million being the normal threshold. Thanks to the banker-engineered slaughter which these companies were subjected to a year ago, dozens of top-quality gold juniors do not qualify for this fund, and this limits the selection available to the fund, although there are still many dozens of companies to choose from.
Also, contrary to the name of the fund, the prospectus also indicates the fund will invest in mid-cap gold miners with market caps in excess of $500 million. While there are some quality companies in this group, as well (with strong growth profiles), the inclusion of these larger companies will tend to reduce the up-side for this fund below what it would have been had the fund focused only on the small-caps.
Unfortunately, the “small print” in the prospectus also gives potential investors in this fund a good reason for worry: the intention of the fund to invest in “derivative” investments. This category of investments is described as “swaps, options, warrants, futures contracts, and currency forwards.” The prospectus warns that investments in these instruments could result in losses exceeding 100% of the amount invested.
It gets worse. The fund intends to have at least 80% of its capital invested in the core assets around which the fund is based. However, this does not mean it will have at least 80% of those dollars invested in the shares of these companies. The company stated that these “derivatives” would be considered part of the core assets of this fund (meaning part of that 80% core). This means that theoretically the fund could hold 0% mining shares, and all derivative instruments.
Obviously, that is an extremely unlikely scenario. The point, however is that there is no possible excuse for deviating into these especially risky assets. In a recent dialogue with readers, I pointed out that one of the exploration “juniors” I'm currently holding has already registered more than a 20-fold gain in its share price off of last fall's lows (i.e. a return in excess of 2000% in one year).
Apparently, the people managing this fund don't think that they can achieve a high enough return through investing in mining equities alone. This certainly suggests that this fund lacks the expertise to identify the best growth “stories,” and so wants to be able to attempt to “juice” returns through the same, Wall Street, Ponzi-like investments which have caused most of the problems in financial markets.
I had previously expressed personal interest in buying into this fund as a relatively “safe” and diversified investment (within this sector). However, should the fund managers choose to invest heavily into derivative investments, the actual holdings of mining equities could be limited, and thus not offer an amount of diversification to justify experienced investors into putting money in this fund. Certainly the “safety” I had hoped for is also not present.
I would rather pick my own stocks one at a time, since I have no intention/desire to invest in the types of risky instruments in which this fund intends to dabble. I wish that I could be more enthusiastic in recommending this fund to investors. When it was first announced, it sounded like an ideal investment for both novices and those with more experience in precious metals.
But “the devil is in the details,” goes the cliché, and certainly the managers of this fund have chosen to “make a deal with the devil.” People investing in precious metals are generally doing so to escape from the dubious (and often fraudulent), “exotic” financial products invented by the devious minds of Wall Street.
It would appear that this point is simply not understood by Van Eck. While the fund managers could choose to risk few of their investor dollars in derivative instruments, the fact that they will not commit themselves to more specific (and more responsible) guidelines for how and where they invest those dollars means that I have to reluctantly “pass” on investing in this fund.
For those investors who do buy in, I certainly wish you luck. However, I also advise you to keep a close watch on exactly what assets are held in this fund. Should the actual holdings in mining company shares not come very close to the 80% “core” in this fund, I would urge investors to seek other options for their precious metals investments.
Disclosure: I hold no position in GDXJ
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This article has 14 comments:
Here's an idea: Maybe we should start an Instablog here that soley deals with juniors approaching the level where the ETF would begin purchasing the junior. Maybe call it, "Junior Miners Approaching The Magic Number."
We could all use our screeners and list those juniors, get in ahead of the ETF, eschewing all the fine print and derivative concerns.
When the junior hits 150M cap, we're already in and ready to surf the wave.
A little team work? What do you think?
I'm off SA for a while. Will check back much later after doing work of another form.
There are about 1000 of these companies, and I'm not personally aware of a source which keeps a GOOD database which ranks these companies by market-cap. So the downside would appear to be that it would take a MAJOR investment of time to get your "short list" of candidates.
The concept is a good one, and if someone was to accumulate such data I would be happy to publish/post it (lol).
On Nov 11 05:49 PM Mayascribe wrote:
> Jeff: Not sure if you caught my comment while your fine article was
> in Instablog form.
>
> Here's an idea: Maybe we should start an Instablog here that soley
> deals with juniors approaching the level where the ETF would begin
> purchasing the junior. Maybe call it, "Junior Miners Approaching
> The Magic Number."
>
> We could all use our screeners and list those juniors, get in ahead
> of the ETF, eschewing all the fine print and derivative concerns.
>
> When the junior hits 150M cap, we're already in and ready to surf
> the wave.
>
> A little team work? What do you think?
>
> I'm off SA for a while. Will check back much later after doing work
> of another form.
>
Have you ever been into this site? miningnerds.com
If you were to examine this site for two minutes, you would see that there are about 14 juniors right there on the threshhold, right now. However, those 14 of which of those juniors are going to be picked up, I have no idea. Yet, if we study them though, we can figure, as a group. which ones make the most sense.
P.S. Those figures are in Canadian dollars.
It's only a theory...
Maya, count me in on the plan, I like it, though I will be looking more long term as a general rule.
On Nov 12 12:21 AM Mayascribe wrote:
> Only 1000 juniors? Divide that by 20 people and suddenly it becomes
> easy to task.
>
> Have you ever been into this site? miningnerds.com
>
> If you were to examine this site for two minutes, you would see that
> there are about 14 juniors right there on the threshhold, right now.
> However, those 14 of which of those juniors are going to be picked
> up, I have no idea. Yet, if we study them though, we can figure,
> as a group. which ones make the most sense.
>
> P.S. Those figures are in Canadian dollars.
On Nov 12 08:56 AM Mayascribe wrote:
> TB: Agreed. No Venezuelan or Bolivian juniors. I steer clear of Hecla
> for that very reason.
No need to apologize - I've been known to get a little "preachy" myself.
No, I hadn't seen that site before. I'll spend more time there a little later. Just wondering if you've checked some of the market cap numbers from the company web-sites - to determine if they are accurate?
My experience with mining sites which keep these large data-bases is that they are generally not kept up to date. If this one is kept current, I'll certainly bookmark it - as these sorts of tables are very handy.
Like I said previously, it's a good idea. Just one proviso, however. If the juniors start to heat-up like myself and a number of other commentators in this sector expect, then the buying-power of one fund won't create as much impact for companies added to the fund.
On Nov 12 12:32 AM Mayascribe wrote:
> Jeff: Apologies for being "preachy," but there just may be a way
> to crack this new ETF's code, and, just maybe all of us could benefit.
>
>
> It's only a theory...
I'm familiar with most of the companies (and hold several). The current components of the fund look very promising.
My worry remains the "derivatives" which the fund reserves the right to invest in - and my suspicion is that the first time the miners suffer a significant pull-back that the fund-managers might decide to jump into derivatives, to try to boost the fund's return.
For those holding this one, pay especially close attention to what the fund does when we have our first pull-back: if they use the pull-back to ADD cheaper shares of these companies - rather than diving into derivatives - then investors may be able to relax a lot more.