Mideast investors welcome new gold junior ETF

The long-awaited Market Vectors Junior Gold Miners exchange traded fund has just been launched under the ticker symbol GDXJ and is bound to be welcomed by the growing fraternity of gold bugs in the Middle East.

This ETF is a basket of 36 small to medium sized companies in the sector, albeit the inclusion of a few large silver producers dilutes its gold bug appeal. However, for the first time an ETF vehicle is available to conveniently trade this little appreciated sector that offers significant leverage to the gold price without requiring debt.

Gold price leverage

With the gold price advancing daily and over $1,120 an ounce at the time of writing this article, there has arguably never been a better time to use this sort of leverage. But you should never forget that this is a play on the gold price and that what has gone up can go back down again.

For a contrarian investor the universal antipathy to the US dollar and the presently rampant dollar carry-trade to buy real assets like gold looks like a party that just has to end soon. Gold juniors would then take the biggest hit in the gold asset spectrum as they did last year, and indeed this fear from 2008 still haunts the juniors.

Yet the rebound from last year’s lows has been spectacular. GDXJ’s underlying index spiked 92 per cent over the past 12 months.

To be included in the index, companies must receive ‘or have the potential to generate’ at least 50 per cent of their sales from gold and, or silver mining. Market capitalization must exceed $150 million and they must have traded at least 250,000 shares a month over the last six months.

Solid portfolio

This is no emerging market play. Two-thirds of the firms are Canadian and 22 per cent from the US and 11 per cent from Australia. The fund has an expense ratio of 0.6 per cent and will rebalance holdings quarterly.

Largest holdings are: Coeur d’Alene Mines 7%; Silver Standard Resources 6%; New Gold 5.6%; Hecla Mining 4.6%; and Gammon Gold 4.5%. This is diversification within a sector where investing in individual stocks is particularly risky.

Perhaps GDXJ is a great ETF to consider buying after a stock market correction rather than before this happens, unless you are in the bullish camp and now feel markets are going to head upwards in a straight line. Then you should buy now.