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Junior Gold ETFs: Riskiest Stocks in the World

Looking to risk total wipe-out on a lottery-like junior gold mining ETF...?
JUNIOR gold miners are one of the the riskiest equity investments one can make without a margin account, writes Scott Burley for Hard Assets Investor, in an article first published at
These small companies, armed with cash and a few unproven mining prospects, have the potential to quickly create or destroy fortunes for their investors in a literal search for buried treasure.
Exchange-traded trust fund investors are lucky enough to have two options when it comes to junior gold miners, both global in scope. But strangely, the more popular of the two ETF funds doesn't provide the best exposure to the niche.
The larger fund, Market Vectors Junior Gold Miners (GDXJ), is the little brother to popular total-market gold mining fund Market Vectors Gold Miners (GDX). It chooses its gold-mining stock holdings based on market cap, with the largest constituents currently about $1 billion in size. GDXJ has about $1.9 billion in assets.
The smaller fund, with less than $50 million under management, is the Global X Gold Explorers (GLDX). It chooses companies that are primarily involved in searching for new gold deposits, resulting in an average market cap of less than half GDXJ's.
What's the difference? The key is that GLDX only holds explorers, firms that seek out new claims and determine how much recoverable gold exists. GDXJ has those too, but it also holds producers – firms that actually extract gold ore from the ground.
It's an important distinction because the risks of each activity are different. Both types of firms are exposed to gold prices. Gold is a notoriously speculative and volatile investment. And last year was not kind to the yellow stuff, which ended the year 37% below its 2011 peak.
Production miners have historically hedged this risk away. While hedging is now uncommon among larger miners, some small producers still partially hedge production to shore up fragile balance sheets. But explorers don't have the option. It's hard to hedge the production of gold that may not be recoverable, or even exist.
Then there's risk from operating leverage. If mining expenses are high, operating profit will be particularly sensitive to changes in gold price. This is a problem for all miners, but explorers in particular run the risk of sinking capital into developing a claim only to find it can no longer be profitably mined.
Finally, there's the obvious risk of investing in a new mining claim: Is there anything down there? Can it be recovered at a reasonable cost? These things are almost impossible for the average investor to evaluate.
All of these risk factors together make accurately valuing an explorer a nearly impossible task. Accordingly, even the faintest rumors about an exploration company can cause huge swings in its stock price.
That risk is part of the appeal of these companies – the possibility of that one big win. And in that respect, GLDX delivers better than GDXJ.
As a pure exploration fund, GLDX excludes small-production miners with relatively predictable future cash flows. Production miners make up about two-thirds of GDXJ. And despite GDXJ's market-cap focus, GLDX holds smaller companies overall.
In the end, an ETF wrapper may not really be the best way to gain exposure to this area of the market, because the smallest – and most speculative – miners are just too small and illiquid to be practical in an ETF basket. Many trade on the pink sheets, or not at all.
But GLDX manages to hold companies further down the market-cap spectrum, for an average market cap that's half of GDXJ's.
Lastly, GLDX is less diversified. If you're hoping for a lotterylike payoff, your best bet is to hold – at most – a handful of miners, and hope that at least one of them makes a big find. GDXJ holds 70 names, while GLDX holds just 20.
GLDX is therefore more volatile than both GDXJ and total-market mining fund GDX, and far more so than physical gold bullion prices or the broad equity market.
That's the real value proposition of a junior gold mining fund. It's a highly volatile instrument, only loosely correlated to other equities, which can be used to add diversification to a portfolio of stocks and bonds.
Unfortunately, neither of the two junior mining funds does its job extremely well. Both are fairly expensive – 0.55% annually for GDXJ, and 0.65% for GLDX. That's $55 and $65 respectively per $10,000 invested. They also track their indexes loosely.
That said, it's surprising to see GDXJ has attracted so much more investor attention than GLDX. GDXJ mostly resembles its larger sibling, while GLDX provides a unique exposure and a wilder ride overall. And in this small corner of the equity universe, that could be a good thing. is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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