One Gold Miner ETF Is Dominating 2012: GDXJ

Jan.23.12 | About: VanEck Vectors (GDXJ)

Gold ETF products have started 2012 on a positive note. Physical gold ETFs, which own physical bars of gold, already have a 6% gain for the year. Gold stock ETFs are also doing well with one notable exception: Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). GDXJ is dominating all non leveraged gold ETFs in terms of performance. The junior gold miners ETF from Market Vectors sports a return of almost 10% year to date. Here's the performance chart from GoldETFs.biz comparing the various gold stock ETFs.

click to enlarge

Gold stock ETFs

In 2012 GDXJ has substantially outperformed - to the tune of over 800bps - its large cap alternative, GDX. This is a big reversal from 2011 when GDX lost 16% compared to GDXJ's decline of 38%. So when did the performance difference emerge? Here's a recent chart comparing GDX to GDXJ courtesy of stockcharts.com.

GDXJ began to outperform GDX in late December.

GDXJ began its outperformance in mid December and has widened the gap of late. What underlying gold stocks make up GDXJ? Let's look at the top 10 holdings of this portfolio.

The top 10 holdings of GDXJ make up over 25% of its portfolio.

GDXJ has 66% of its 80 stock portfolio invested in Canadian companies. It just so happens that Alamos Gold, a Canadian firm, is the top holding of GDXJ at 4.97%. It is interesting to see the relationship in performance between the two since mid December in the chart below. Note the disconnect in early January and then a return to a similar correlation.

Beyond its top holdings and geographic bent, GDXJ is influenced most heavily by its small cap bias: 70% of the portfolio contains stocks with less than $1 billion in market cap. The other 30% contain companies in the $1 - $5 billion range, which is considered mid cap. In comparison, GDX has 88% of its portfolio invested in companies above $5 billion in market cap. This capitalization focus is the primary explanation in performance differences between the two ETFs.

Stepping back beyond the first three weeks of 2012, it appears that GDXJ is likely benefitting from the disconnect it experienced from gold prices in 2011. While GDX tracked gold prices better, GDXJ took an adventure that led it to an oversold position relative to gold and large cap gold miners. Here's the performance chart from stockcharts.com. Note GDXJ's recent elevated correlation with GLD, the largest physical gold ETF.

GDXJ has narrowed the gap with GLD and GDX.

Make no mistake, GDXJ is a volatile way to play gold. Its current outperformance of GLD and GDX could swing to underperformance in a day or two of trading. For now however the market has aggressively bounced GDXJ upward off a support level. Of note is the recent opposite behavior of GDX, which brings to mind a potential long/short tactic. GDXJ will continue to be an ETF to watch in the coming weeks to see if it can extend its recent rally, going from zero to hero.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.