Is It Time To Buy Junior Gold Mining ETFs? (GDXJ, GLDX, GGGG, GDX)

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November 16, 2012 12:05am NYSE:GDX NYSE:GDXJ

Eric Dutram: Although gold prices are still down from a one year look, the yellow metal has been surging back in recent months. Over the past three months the precious metal

has risen by about 7% and is now beating out—just barely—broad market returns over the YTD time period, suggesting that gold investing could once again be in focus.

Unsurprisingly, this trend has also carried over in the mining segments of the precious metal world as well with the top gold mining ETFs like (NYSEARCA:GDX) and (NYSEARCA:GGGG) seeing strong gains in the trailing three month period.

Both are easily beating out the S&P 500 in the time frame, helping to eat into the significant level of underperformance that both had seen against the key benchmark since the start of the year (readThe Comprehensive Guide to Gold ETF Investing)

Yet beyond these large cap focused mining ETFs, investors have a few more volatile gold mining ETF options that could also be interesting picks in this environment. That is because both of these choices invest in small cap firms or those that are exploring for—but are not producing—gold and are much more hit-or-miss depending on broad economic conditions.

Generally speaking, these two act even more as leveraged plays on the underlying metal as their large cap focused cousins so they can see extreme levels of volatility in a short period of time. When gold is slumping this can translate into huge losses, but when gold is surging we can see huge gains in these types of gold mining ETFs.

Potentially this could be the situation now in the gold market, particularly since the metal is now on par with stock investments in the YTD period, and worries remain over the fiscal cliff and European plans to deal with their issues.

For these reasons, gold bulls in the short-term may want to consider looking to small caps for exposure if they are seeking a continued bullish trend in the precious metals market as we are closing out the year (read is WITE the Perfect Gold ETF Complement?).

Below, we have highlighted in greater detail two of the top choices that investors have in this slice of the market. While they are somewhat similar, it is important to note that they are by no means going to move in lockstep—nor have we seen them do that over the past year—so one should definitely pay attention to the key differences in the group before choosing one for investment.

Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ)

This popular ETF looks to focus on the small and mid cap firms in the gold and silver mining industry. This is done by tracking as closely as possible the price and yield performance of the Market Vectors Junior Gold Miners Index.

This results in a fund that charges investors 54 basis points a year, but one that has incredible volume of over 3.5 million shares a day. In total, the ETF has just over 80 companies with 33% going to mid caps and the rest to small, giving the fund a weighted average market cap of just $850 million.

In terms of holdings, Canada dominates at 60% of total assets followed by a hefty Australia weight of just under 28%. It should also be noted that the fund does a great job of spreading out assets with no one firm accounting for more than 4% of assets (read Shine and Protect Your Portfolio with Gold ETFs).

Performance in the past three months has been strong at 15.5%, although it is down nearly 11% YTD, so there could still be plenty of room to run for this small cap focused ETF.

Global X Gold Explorers ETF (NYSEARCA:GLDX)

For an even riskier play on the gold market, investors could consider this ETF that focuses in on gold explorers. These companies aren’t necessarily producing the precious metal but are actively looking for new deposits and hoping to get scooped up by large cap firms in the process.

Obviously, this is a pretty high risk strategy so an ETF approach could help to spread some of the volatility around a bunch of names. This can be done with GLDX as the fund follows the Solactive Global Gold Explorers Index which invests in 20 securities in total (read Bet on a Gold Comeback with the Gold Explorers ETF).

In this ETF, micro caps account for nearly half the portfolio while small caps make up 34% and mid caps the relatively small remainder. This fund is also a little more expensive and illiquid than its Market Vectors counterpart, at 0.65% a year in volume below 100,000 shares a day, so total costs will be higher.

From a company look, about 20 stocks make up the portfolio although no one firm accounts for more than 7% of assets.  Canadian securities also dominate this ETF at nearly 90% of the total, while the U.S., Australia, and the UK roughly equally split the remainder.

In the past three months, this risky fund is up over 5%, somewhat underperforming the broad gold space. Additionally, it has been hammered in the YTD look, losing more than 24%, among the worst in the sector (read Gold ETFs: Why Bid Ask Spreads Matter).

While this shows just how volatile the fund can be, it also suggests that if the gold market continues to improve, GLDX could be due for a bounce back more than most in the space. This is especially true if M&A activity heats up and developed market issues continue to put fear into investors around the world and make gold a popular investment once more.

Written By Eric Dutram From Zacks Investment Research   

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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