What's In Your Gold Miner ETF? The Implications Of A Reverse Split In The Pure Gold Miners ETF

| About: Global X (GGGG)

2013 has been a tough year for gold and silver as well as ETFs and stocks associated with the sector. The action has led many to suggest the bull market in gold and silver are over. The SPDR Gold Trust (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA:SLV), the two most popular ETFs that track spot gold and silver prices, are down 12.4% and 22.1% respectively. The gold and silver miners, as measured by the Gold Miners Index (NYSEARCA:GDX), the Junior Gold Miners Index (NYSEARCA:GDXJ) and the Global X Silver Miners (NYSEARCA:SIL) have been hammered in the same time frame, down 40.6%, 48.0% and 38.0% respectively. The miners have been hit so hard by the sell-off in gold and silver that one of the popular investment vehicles to gain exposure to the gold miners, the Global X Pure Gold Miners ETF (NYSEARCA:GGGG), has seen a 48% loss in just 6 months, trading from $11.79 down to $6.60.

The Difference Between GGGG, GDX, GDXJ and SIL

It is important to consider the holdings of each of the major gold/silver mining funds. The website of each fund details the weightings of each holding in the index. While these numbers are subject to change, they give a strong indication as to how the fund operates and is managed. It also can provide an understanding as to why some funds are down more than others.

The top ten holdings (as of April 30, 2013) of the GDX are as follows, with an estimated percent allocation of the GDX's capital.

Company Name Stock Ticker Percent allocation
Goldcorp (NYSE:GG) 11.8
Barrick Gold (NYSE:ABX) 9.6
Newmont Mining (NYSE:NEM) 7.9
Randgold Resources (NASDAQ:GOLD) 5.6
Yamana Gold (NYSE:AUY) 5.3
Gold Fields (NYSE:GFI) 5.1
Silver Wheaton (SLW) 4.9
AngloGold Ashanti (NYSE:AU) 4.8
Agnico Eagle (NYSE:AEM) 4.5
Eldorado Gold (NYSE:EGO) 4.5

The top ten holdings (as of April 30, 2013) of the GDXJ are as follows, with an estimated percent allocation of the GDXJ's capital.

Company Name Stock Ticker Percent allocation
Argonaut Gold (OTCPK:ARNGF) 4.3
Torex Gold (OTCPK:TORXF) 4.0
China Gold Intl Resources (OTCPK:JINFF) 3.3
Liongold Corp. (A78.SI) 3.2
Sandstorm Gold (NYSEMKT:SAND) 3.0
Perseus Mining (OTCPK:PMNXF) 3.0
Oceana Gold (OTC:OCGPF) 3.0
Dundee Precious Metals (OTCPK:DPMLF) 2.9
Medusa Mining (OTCPK:MDSMF) 2.8
Aurizon Mines Ltd. (AZK) 2.8

The top ten holdings (as of May 6, 2013) of the GGGG are as follows, with an estimated percent allocation of the GGGG's capital.

Company Name Stock Ticker Percent allocation
Alamos Gold (NYSE:ALG) 6.5
Polyus Gold (OTC:PLZLY) 6.0
Randgold Resources (GOLD) 5.9
Koza Altin Corp (OTCPK:KOZAY) 5.4
Alacer Gold (OTCPK:ALIAF) 5.1
Zhaojin Mining (OTCPK:ZHAOF) 5.1
Argonaut Gold (OTCPK:ARNGF) 5.0
Centamin Egypt Metals (OTCPK:CELTF) 4.9
Perseus Gold (OTCPK:PMNXF) 4.7
B2 Gold Corp. (BGLPF.PK) 4.7

As detailed in the above comparison tables, the weightings of each of the major gold miner ETFs vary substantially. The GDX invests heavily in large and medium cap well established gold miners. Most pay a dividend as well. The GDXJ invests in smaller junior miners as the name implies. They also have some international exposure. Smaller miners tend to move in larger percent changes with the drops and pops in gold and silver prices. This may be why GGGG is down the most, as it is similar to GDXJ in that it invests in smaller pure gold miners, with much international exposure. An exception is its holdings in GOLD, which is a larger company. Given the performance of all of these individual equities, especially the underperformance of the smallest cap names, these indices have been crushed this year. Shareholders of each of these companies should take note of these index holdings. Why? It is important to understand that these fund buying and selling are a major source of price fluctuations in the stocks, in addition to mutual fund, hedge fund and retail investor moves. Changes in the weightings can be a sign of buying and/or selling in the fund. For example, ABX was the top holding in GDX in February, at nearly 13% of the assets. Now, GG has taken the top spot. Keeping an eye on these fund holdings is important. Further, the stocks in the index explain why some indices have underperformed, namely the GGGG being down more so than the others.

As such, Global X, a leader in providing gold and silver ETFs announced on May 2, 2013 it will execute a reverse share split of GGGG, which seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Gold Explorers Index (the top holdings of which are shown in the table above). Highlighting the problems the stocks in the gold mining space have had, Global X believes that its post-split investment prices will be more attractive for buyers.

What the Reverse Split Does for Common Stock Shareholders

It is important to note that the most popular gold mining indices, the GDX and GDXJ will not be affected by this reverse split even though they have been crushed in the last 6 months as well, however some of Global X's other products will be adjusted as well. The reverse split will be conducted at a ratio of 1 for 2 and will apply to shareholders of record at the close of the markets on May 15, 2013, and will begin trading at the adjusted price on May 17, 2013. The ticker symbol for the fund will not change. The reverse split will increase the price per share of the fund with a proportionate decrease in the number of shares outstanding.

In a 1 for 2 reverse split, every two pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced at twice the value of the pre-split share. The following example best illustrates what to expect: If you hold 1000 shares of GGGG priced at $7.00 each, then after the reverse split, you will hold 500 shares valued at $14.00 each. As you can see, the reverse split does not change the value of a shareholder's investment; it still remains $7,000.

What Will Happen to So Called 'Fractional Shares'

Shareholders who have quantities of shares that are not a whole number with an exact multiple of the reverse split ratio will be left with what is known as a fractional share. A fractional share will be created and affect any shareholder who does not hold a number of shares that is a multiple of five. After the reverse split occurs, fractional shares will be redeemed for cash and sent to your broker of record, generally within two to three weeks post-split. One issue to consider in this event is that redemption of fractional shares forces shareholders to realize either small gains or losses, which could result in a taxable event in addition to having a potential loss on investment if prices are below where they were purchased. Given that the gold and silver markets are near lowest levels in years and the miners are still forming a bottom, a loss is a strong possibility with GGGG. To avoid this scenario, investors can purchase more shares to round out their GGGG holdings to a multiple of two, or to sell an appropriate number of shares to round out the holdings.

In most cases of a reverse split, it would be prudent to describe what happens if you have options contracts on a stock that is undergoing a reverse split. In this case, GGGG does not have any options contracts written on it at this time, thus we need not consider it.


In summary, we are seeing the gold miners struggle to find a bottom in light of the weakness of gold and silver prices. This reverse split is simply a symptom of the struggles that the mining stocks have faced. GGGG is down 48% in just six months, currently trading at $6.60. The larger mining ETFs, the GDX, GDXJ and SIL are also down considerably. At current levels, I believe this sell-off is a buying opportunity for long-term investors in these names. Further, GLD and SLV are good buys for a rebound in gold and silver. These metals dropped rapidly resulting in record demand. This demand should translate to higher prices in the future. Like the aforementioned gold and silver ETFs, GGGG a good long-term buy at current prices, even pre-split. To bring the product to an investment price that Global X believes is more attractive, it is conducting this reverse split. The reverse split of shares only really negatively impacts investors who own common shares at a total that is not a multiple of two, as they will be forced to sell fractional shares at a loss, or a potential gain, that could results in a taxable event. The reverse split is simply a symptom of the sell-off in gold and silver equities, which I regard as good long-term buys.

Disclosure: I am long SAND, SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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