There are two dominant gold mining ETFs in the marketplace today, GDX and GDXJ. The question for many is which ETF is the better fit? Recently the leadership and money flows have switched between these two ETFs, so now may be a great time to take a closer look at these two gold mining products.
GDX is the original gold mining ETF from MarketVectors which focuses on large cap names. GDXJ, also from MarketVectors, takes the opposite approach and owns the junior - or small cap - gold miners. In addition to the market cap difference, there is also a geographic weighting difference between the fund. This is found in the second tier of each fund's country weightings. Let's review the data.
Here's the market cap and country breakdown of each ETF from the MarketVectors website. First, the details on GDX.
Next the details on GDXJ.
As you can tell from the breakdown, these funds are primarily different via market capitalization. GDX has 87% in large cap names while GDXJ has 98% in small and mid caps.
The second wrinkle that many miss is that the funds' geographic similarities and differences. Both ETFs have an eerily similar 62% weighting in Canada, however that is where it similarity ends. GDX adds a 15% exposure to the U.S. and a 12% South African weighting. GDXJ goes in a different direction with a 23% exposure to Australia and an 8% weighting in the United States.
GDXJ started the year with a roaring start, outdistancing GDX by over 700bps at one point. However the tables turned as gold prices and stocks began to tumble in late February. Here's a chart of GDXJ versus GDX year to date. Note the lead GDXJ jumped out to early on, the late February cliff dive of both ETFs and the narrowing of the return differential between GDXJ and GDX.
Investors have noticed this and the money flows into these ETFs have changed sharply. A casual glance at year to date flows into these two ETFs shows GDXJ with an inflow of $211 million and GDX with outflowsof $106 million.
But a closer examination of the flows since March 1st paints a totally different picture. Since the late February plunge, GDX has had inflows of $311 million while GDXJ has had only $43 million of new assets. A huge rotation is underway. Here's the data from Index Universe's Fund Flow Tool.
So why has GDX prospered while GDXJ floundered during this gold stock decline? It seems that investors prefer the relative safety and lower volatility of large cap gold miners. This may be an indication of bearish attitudes towards gold or even a "derisking" of gold mining allocations.
These two ETFs have different levels of volatility after all and that level of volatility has gradually increase over the last year. Here's a one year chart of the volatility of GDX and GDXJ from a great tool onETFreplay.com.
So in the battle between GDX and GDXJ, who wins? The answer is found by analyzing two factors unique to each investor: degree of gold sentiment and time horizon.
Assuming an allocation to gold miners must be made, GDX seems to be more attractive to someone who is less bullish and short term oriented due to its relative defensiveness. On the other hand, GDXJ appears to be a better fit for a more bullish investor who has a longer term time horizon and can wait for the increased volatility to propel GDXJ on the upside.
Of course an entirely different solution exists, an allocation to both ETFs. An ETF like that may just exist in the newly launched gold mining ETF from iShares (RING). With a market cap weighting scheme between GDX and GDXJ, similar country diversification and the lowest expense ratio of any gold mining ETF, RING has attracted some material interest. I will leave you with RING's market cap and country breakdown from the iShares site.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.