Gold
miners’ exchange-traded funds are surging with gold powering
higher. These mounting gains are naturally fueling growing interest
in the leading gold-stock investment vehicles. Traders looking to
deploy capital are wondering which major gold-stock ETF is superior,
offering the best balance between upside potential, component
fundamentals, and risks. GDXJ takes the crown, besting its larger
big brother GDX.
By
my count, there are currently 14 gold miners ETFs trading in US
markets. But that’s not authoritative, as the broader ETF industry
is constantly in flux. These gold-stock ETFs collectively held
$17.5b in net assets as of the middle of this week. And two major
ETFs utterly dominated, commanding fully 85.1% of all those
gold-stock investments! They are of course GDX and GDXJ, which
dwarf everything else in this sector.
The
GDX VanEck Vectors Gold Miners ETF and GDXJ VanEck Vectors Junior
Gold Miners ETF hold net assets of $10.6b and $4.4b, or 60.2% and
24.9% of American gold-stock ETFs’ total. They have a huge and
likely-insurmountable first movers’ advantage, being birthed way
back in May 2006 and November 2009 respectively. They’ve gradually
built great brand recognition, even being viewed as primary
sector indexes.
When
hedge funds report their equity holdings every quarter, if they have
any gold-stock exposure GDX or GDXJ often top those lists. When
gold miners are discussed on CNBC, GDX and to a lesser extent GDXJ
are used in charts as sector benchmarks. VanEck’s popular pair of
leading gold-miners ETFs are well-known to investors and speculators
interested in this sector. They are effectively the only game in
town.
With
one company managing both GDX and GDXJ, and actively marketing them
as a “Gold Miners ETF” and a “Junior Gold Miners ETF”, you’d think
they are as different as their names imply. But unfortunately
that’s not really the case. GDX and GDXJ hold many of the same
component gold miners, with massive overlap in their holdings. And
GDXJ’s definitely aren’t junior gold stocks, but actually larger
mid-tier gold miners.
I’ve
researched and written extensively on this. Every quarter I wade
through the latest results from the top 34 component stocks of both
GDX and GDXJ. The latest-available data is still Q3’18’s, as the
full-year reports including Q4 aren’t due until 60 to 75 days after
year-end depending on companies’ market capitalizations. As the
recent Q3 earnings season wrapped up,
GDXJ’s components
were a subset of GDX’s.
GDXJ’s top 34 stocks accounted for 82.9% of its total weighting.
And fully 31 of these components were also GDX components. These
common gold miners across both ETFs weighed in at a massive 79.2% of
GDXJ’s total weighting, and 31.7% of GDX’s. So nearly 4/5ths of
this “Junior Gold Miners ETF” is made up by nearly 1/3rd of the
major “Gold Miners ETF”. GDXJ is now a mid-tier gold miners ETF,
not a junior one!
It
wasn’t always this way, with GDXJ staying true to its advertised
mission in its early years. But GDXJ became a victim of its own
success in the first half of 2016. A young gold bull fueled
skyrocketing gold-stock prices as traders flooded in to chase their
rallies. GDXJ quickly grew so large that it risked running afoul of
Canadian securities laws, where most of the world’s smaller gold
miners’ and explorers’ stocks trade.
In
the Canadian stock exchanges which are the center of the junior-gold
universe, an antiquated rule severely hobbles ETFs. Once any
investor including ETFs acquires a 20%+ stake in any Canadian stock,
it is legally deemed a takeover offer that must be extended
to all shareholders! American stock-market capital flooding into
GDXJ in early 2016 pushed many of its Canadian-junior ownership
percentages near 20%.
Obviously hundreds of thousands of investors buying ETF shares have
no intention of taking over gold-mining companies, no matter how big
their collective stakes. That’s a totally-different scenario than a
single corporate investor buying 20%+. Instead of lobbying Canadian
regulators to exempt ETFs, GDXJ’s managers chose to unilaterally
redefine what junior gold miners are. Stakes in Canadian juniors
were slashed.
For
decades juniors were often considered to be gold miners producing
less than 200k ounces annually. To give GDXJ the benefit of the
doubt, I conservatively expand that to 300k. That works out to 75k
per quarter. In Q3’18, only 3 of the top 34 GDXJ component stocks
were primary gold miners that met this junior threshold! The rest
were mid-tier miners between 300k to 1m ounces per year, and even
1m+ majors.
GDXJ
made these mission changes stealthily, knowing they would be
controversial. It took me quarters to piece this all together, and
I was an outspoken critic of the “Junior Gold Miners ETF” no longer
being what it was billed as. But if you ignore the deceptive title,
GDXJ has grown into an amazing mid-tier gold-miners ETF. It
owns lots of the world’s best gold miners, which are given
much-higher weightings than in GDX.
The
mid-tier gold miners producing between 300k to 1m ounces per year
are in the sweet spot for stock-price upside. Unlike the majors
over 1m which are struggling with production declines, the mid-tiers
are expanding existing mines and building new ones to boost their
output and earnings. The mid-tier gold miners have smaller
market caps too, making it much easier for capital inflows to bid up
their stock prices.
Production is the lifeblood of the gold-mining industry, so traders
often prize growth there above anything else when picking gold
stocks. In Q3’18, the top 34
GDX gold miners
including all the majors saw their total production decline 2.9%
year-over-year to 9.5m ounces! That was stunning compared to
the World Gold Council’s read on overall global gold mined that
quarter, which actually grew a healthy 1.9% YoY.
GDX
is heavily burdened by giant gold miners with shrinking production
and high market caps, retarding its upside potential. GDXJ has some
similar problems but to a lesser extent. Inexplicably GDXJ includes
the major South African gold miners which are the worst in this
industry for falling production and high mining costs. In Q3
four of them weighing in at 13.1% of GDXJ’s weighting suffered
sizable production declines.
Excluding them and a fast-growing mid-tier gold miner that was oddly
removed from GDXJ over the past year, the rest of the top 34 GDXJ
gold miners achieved strong 3.4% YoY production growth in
Q3! All the growth in the gold-mining industry is now coming from
the mid-tier miners. GDXJ not only holds the best mid-tiers, but
they have much-higher weightings than in the major-dominated GDX.
GDXJ is the place to be.
In
addition to the mid-tier gold miners’ growing production and lower
market capitalizations, their mining costs are in line with the
majors. In Q3 the top 34 GDX gold miners averaged all-in sustaining
costs of $877 per ounce. The difference between that and prevailing
gold prices shows industry profitability. The top 34 GDXJ gold
miners had similar $911 AISCs in Q3. Without those South African
majors, it was $877 too.
So
if you can get past the fact GDXJ certainly isn’t a “Junior Gold
Miners” ETF, it is superior to GDX in every way. The top 34 GDX
stocks averaged 288.8k ounces mined in Q3, while GDXJ’s top 34 came
in 43% lower at 163.3k. That’s still far above the 75k conservative
junior threshold, but this mid-tier gold-miner range is where the
vast majority of world production growth is happening. GDXJ action
reflects this.
I’ve
been writing about GDXJ outperforming GDX in my quarterly-results
essays and newsletters for the better part of several years now.
But until this week I hadn’t done the work to formally quantify
GDXJ’s superior upside. I’ve been curious about it for some time,
and have received more questions on it with gold stocks powering
higher again. So I dug into this gold-stock bull’s GDXJ and GDX
performances so far.
Since gold miners’ stocks are exceedingly volatile, bulls and bears
in them are often delineated instead by gold itself.
Today’s gold bull
was born in December 2015 before surging in a powerful upleg in the
first half of 2016. While gold has suffered a couple of serious
corrections since, it never crossed that -20% new-bear threshold.
So with gold in a continuous bull market for 3.1 years now, so too
are the gold stocks.
They
are effectively leveraged plays on gold since gold-mining
profits directly amplify underlying moves in gold. The major gold
stocks of GDX generally leverage gold uplegs and corrections by 2x
to 3x. So if gold rallies 10%, GDX usually climbs 20% to 30%.
Since GDX has become
the leading
benchmark for this entire sector, GDXJ’s performance is best
considered relative to GDX’s. This chart summarizes it all.
GDX
and GDXJ were both hammered to
fundamentally-absurd all-time lows back in mid-January
2016 soon after gold’s own 6.1-year secular low. Ever since gold
stocks have meandered in a series of bull-market uplegs and
corrections. The performances of GDXJ and GDX in these recent years
are rendered in blue and red below. Key stats are shown for each
major gold ETF’s uplegs and corrections during that span.
The
vertical light-blue lines divide up GDXJ’s uplegs and corrections,
which generally match GDX’s but sometimes see major lows or highs
out of sync. Each GDXJ upleg or correction shows GDXJ’s total gain
or loss, the time that move took in months, GDX’s corresponding move
over that identical span, and GDXJ’s leverage to GDX in
yellow. The actual full GDX uplegs and corrections are also shown
below in red.
Even
in today’s young, delayed, mostly-unpopular, and weak gold-stock
bull, GDXJ has outperformed GDX by a wide margin. And that’s
despite GDXJ morphing from being a true junior-gold-miner ETF in the
first half of 2016 to a mid-tier gold-miner ETF over the subsequent
year. Even holding bigger gold miners, their superior fundamentals
to the struggling majors have enabled GDXJ to keep the performance
crown.
In
just 6.4 months in largely the first half of 2016, gold stocks as
measured by GDX skyrocketed 151.2% higher on a 29.9% gold upleg.
GDXJ well-outperformed GDX in roughly that same span, blasting
202.5% higher in 7.0 months! GDX actually rallied 146.6% within
GDXJ’s exact upleg, showing the mid-tier gold-stock ETF leveraged
the major gold-stock ETF’s massive upleg by a solid 1.38x.
GDXJ’s upside bested GDX’s.
Gold’s powerful initial upleg was followed by a massive correction
in the second half of 2016, where it plunged 17.3% after Trump’s
surprise election victory unleashed a huge stock-market surge on
hopes for big tax cuts soon. The gold-stock carnage as gold plunged
was great, with GDXJ plummeting 45.5% in just 4.1 months.
Interestingly that leveraged GDX’s downside by 1.20x, much less than
in the preceding upleg.
Ever
since, the gold stocks have been mostly stuck in a big
consolidation
trading range. Enthusiasm for this sector waned to nothing as
general stocks kept powering higher in recent years which relegated
gold to drift sideways as well. While this extraordinary
gold-stock-bull disruption was highly unusual, it was the result of
record US corporate tax cuts levitating the stock markets. That
one-off event finally passed in 2018.
If
you go through all this gold-stock bull’s uplegs, GDXJ’s gains
outpaced GDX’s by an average of 1.39x! Ranging from 1.30x on
the low side to 1.51x on the high side, there was not a single
gold-stock upleg in recent years where GDXJ didn’t majorly
outperform GDX. Taking GDX’s usual 2x to 3x leverage to gold
and adding another 39% of marginal GDXJ gains on top of that is
impressive. What trader wouldn’t want that?
GDXJ’s much-superior upside in this young bull is also accompanied
by outsized downside relative to GDX during gold-stock corrections.
That’s logical, as bigger mid-tier gold-stock gains in preceding
uplegs leave more room to sell off in subsequent corrections.
Interestingly though, GDXJ’s downside leverage averaging 1.34x is a
bit lower than its upside leverage in uplegs. That is skewed to the
high side as well.
It
ranged from a low of 1.07x in the latest gold-stock selloff last
summer and autumn to a staggering 1.77x in spring 2017. That
outlier was the result of GDXJ’s gold miners surging far faster than
GDX’s in early 2017. Without that anomaly, GDXJ’s downside leverage
to GDX during corrections averages only 1.20x. That is merely about
half its upside leverage, so GDXJ’s added risks are
disproportionally smaller than its better upside.
Given all this, there is really no reason to bother with GDX at all
if you are deploying capital in major gold-stock ETFs. GDXJ has
better mid-tier gold miners growing their production while trading
at lower market caps than the struggling majors. GDXJ has
demonstrated much-better upside during gold-stock uplegs throughout
this young bull, yet its downside during corrections isn’t
proportional. GDXJ is far superior.
That
being said, investors and speculators are much better off
avoiding these major gold ETFs entirely! While GDXJ is nowhere
near as bad as GDX, both are still burdened by major gold miners
with declining production and rising costs. It doesn’t make any
sense to own such laggards when they can be avoided entirely in
favor of mid-tiers and true juniors with great fundamentals like
growing production and stable costs.
The
best strategy for riding this reaccelerating gold bull to
wealth-multiplying gains in gold stocks is to carefully handpick
the best mid-tier gold miners mostly included in GDXJ. Every
quarter I break out
this ETF’s top 34
and look at their production, costs, operating cash flows, earnings,
and sales trends among others. That exercise helps separate the
gold miners with better fundamentals from the lagging weaker ones.
So
instead of just settling and owning GDXJ, even-better gains are
highly probable by sticking to mid-tiers and juniors with superior
fundamentals. They rank lower in GDXJ’s weightings and are usually
growing their production organically or through new mine builds that
recently came online or will soon be live. With plenty of great
gold miners in this sector, there’s simply no need to hold the
laggards retarding even GDXJ.
With
gold stocks now enjoying
a major upside
breakout, massive new investment buying is coming. And the best
gains by far will be won in smaller mid-tier and junior gold miners
with superior fundamentals. While GDXJ itself will power
dramatically higher despite some deadweight in its holdings, the
better gold miners will generate much-greater wealth creation.
Finding and owning these better gold-mining stocks is essential.
That’s one of my important missions at Zeal, relentlessly studying
the gold-stock world to uncover the stocks with the greatest upside
potential. The trading books in both our
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Most of these trades are relatively new, added in recent
months as gold stocks recovered from deep lows. So it’s not too
late to get deployed ahead of big gains!
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The
bottom line is GDXJ’s upside easily bests GDX’s. While GDXJ is now
really a mid-tier gold miners ETF instead of the junior one
advertised, it holds some of the world’s best gold miners. Unlike
struggling majors which dominate GDX, plenty of mid-tiers are still
growing their production. They enjoy superior fundamentals and are
weighted much more heavily in GDXJ than GDX, giving it much-better
potential gains.
Throughout this entire young gold bull of recent years, GDXJ has
well-outperformed GDX during gold-stock uplegs. While that has also
led to bigger downside during corrections, it is disproportionally
small compared to the upleg gains. GDXJ simply offers superior
gold-stock sector exposure than GDX. But both these major
gold-stock ETFs are still burdened with laggards dragging down their
overall performances. | 
