Is The GDXJ Really Killing The Market?

Source: stockcharts.com

The past few weeks, there has been a lot of fuss about the GDXJ ETF. An Exchange Traded Fund issued by Van Eck which aims to track the index of junior gold mining companies. The ETF has always been extremely popular among investors as it provided an easy and low-cost access to gaining exposure to the junior gold space.

It didn’t take long before derivative-focused products took off as well, of which the Direxion-products offering a triple leverage on the GDXJ index ETF were very likely the most popular. When Direxion stopped issuing new units amidst a sky-high demand, several key people started to wondering whether or not the GDXJ became too popular.

With a net asset value of several billions, the ETF is definitely large, but it would be highly surprising if the current size (just $4B) would be such a disruptive factor in the mining industry, and the junior gold mining index. At least, that shouldn’t be the case, as the top-5 of GDXJ’s positions have a combined market capitalization of approximately $10B (this excludes the position in the GDX).

While the GDXJ is absolutely popular for the right reasons, one might argue the GDXJ  has become too big compared to the size of the companies it’s investing in.

But perhaps this isn’t a problem at all. In fact, it’s a positive thing, as it means there very clearly is a huge interest from the investing community to gain exposure to junior gold mining companies. An ETF is obviously the easiest and fastest way to get exposure to several companies in ‘one basket’, rather than going through the process to buy the companies separately.

So, even if the GDXJ would close its doors for new investors (by for instance suspending the creation of new units), the money would still flow into the sector, and the issues wouldn’t be solved at all. Only the ‘convenience factor’ would go down. In fact, the best way to solve the current size of the GDXJ is simply to wait for a market correction.