Why Is GDXJ Underperforming?

Sep. 9.11 | About: VanEck Vectors (GDXJ)

In mid-August of 2010, I recommended buying three ETFs -- immediately. One of those recommendations is up over 130%; another is up nearly 20%; and the third is the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), which is now up about 40% from my initial recommendation. Gold, over that same period of time, is up approximately 50% -- which means something is going wrong with my GDXJ recommendation.

I fully expected GDXJ to outpace gains made in gold. In fact, at the time I made the recommendation, GDXJ actually was outpacing gold -- and that's what I pointed out in 2010:

The good news is that this ETF is currently doubling and tripling gains made in gold's price. That's usually how it goes for individual gold miners, and since this fund is a collection of miners, it's not surprising that it exhibits the same characteristic.

Ever since I wrote that, it's been a disappointment. This ETF simply hasn't fulfilled the goal and the promise I made. If GDXJ had consistently outpaced gains made in gold by even a single percentage point, I'd call this recommendation a total success. But it hasn't, so it's not.

Let me be perfectly clear: I'm not calling this pick a failure. It's returned 40% during a time when the S&P 500 only returned 10%. With a little bit of luck, I made this recommendation at a perfect time to buy this fund and the other two ETFs. And I also don't believe that the ETF itself is flawed. The companies in the fund are a fine mix of smaller gold and silver miners.

I still think it's the single best way to get exposure to the upside of the precious metals mining sector, but the market simply hasn't flocked to gold miners in the way that I thought it would -- or the way it typically has historically.

There's really no good reason. It's not as if we're at a point where miners' margins are being compressed by rising energy, labor, taxes or falling prices. In fact, it's just the opposite. Energy costs are significantly lower than their year to date highs. Labor costs haven't budged. Taxes for most mining regions have been pretty static. And most importantly: Gold prices are up big time.

Nearly every star is aligned for this ETF -- and yet, we haven't caught a break. But I believe this ETF's best days are ahead of it. I think we'll see huge outperformance for this fund -- and I simply can't state in any stronger terms that I believe you should own it today if you don't already.