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The Direxion Daily Junior Gold Miners ETF Isn’t the Best Play on Gold

For double-leveraged resource-sector thrills and chills, adventurous traders often turn to Direxion Daily Junior Gold Miners (NYSEARCA:JNUG) stock. It’s an asset that, outside of fees and other expenses, seeks to double the performance (both up and down) of the MVIS Global Junior Gold Miners Index.

This Is Why JNUG Isn't the Best Gold-Miner Stock Play

Source: Shutterstock

It’s an interesting way to potentially magnify one’s gains in the junior gold miners. For simplicity’s sake, we can broadly define junior gold miners as exploration-stage companies with less developed operations than senior gold miners.

It takes agility and deep research skills to capitalize on the rapid movements in junior gold miners. Perhaps you don’t want to be a stock picker and would rather let Direxion do the legwork on your behalf.

There’s merit to this idea, but we still need to weigh the pros and cons of using this exchange-traded fund to place a directional bet on the gold-mining sector. Plus, it will be essential to examine the current state of gold and the companies that mine it.

It’s Not for Everyone

First and foremost, let it be said that the JNUG ETF is not appropriate for long-term investors. Leveraged assets are, in many cases, notoriously bad at tracking their underlying indexes for more than a few weeks. In fact, sometimes the asset and the underlying index start to diverge within a matter of days.

Direxion basically acknowledges this and provides an important word of caution to prospective investors in JNUG stock:

“These leveraged ETFs seek a return that is 200% or -200% of the return of their benchmark index for a single day. The funds should not be expected to provide two times or negative two times the return of the benchmark’s cumulative return for periods greater than a day.”

Does this mean that only intra-day traders should use JNUG stock? Not necessarily. The point is that, in theory, we can’t expect the asset to follow the MVIS Global Junior Gold Miners Index closely for more than a day.

But in practice, the ETF usually tracks the index fairly well for a few days and even a few weeks (no guarantees here, of course). Beyond that, be advised that index tracking will be poor. And by that, I mean your returns will probably lag those of the index.

Assessing the Junior Miners

All of that being said, the JNUG ETF does offer exposure to some of the best-known junior gold miners in the world. These include Kinross Gold (NYSE:KGC), Yamana Gold (NYSE:AUY) and B2Gold (NYSE:BTG).

Prospective investors should be aware, though, that JNUG’s holdings are heavily concentrated in a few geographic regions. To be specific, 49.23% of the holdings are in Canada, 23.29% are in Australia and 9.97% are in South Africa. The other geographic representations are comparatively much smaller.

In regard to gold itself, the spread of the novel coronavirus has undoubtedly spurred safe-haven demand. The spot gold price managed to maintain the $1,700 level throughout much of April and early May. That’s good news for the junior gold mining space.

On the other hand, the coronavirus’s spread has led to supply chain disruptions. A number of gold mines throughout Canada have had to suspend their operations. And with the JNUG ETF relying so heavily on Canadian gold miners, this factor remains a major concern for shareholders.

Even amid these disruptions, however, some junior gold mining companies remain confident. B2Gold, a Canadian holding of the ETF, posted record revenues of $380 million during the first quarter. For 2020, the company projects record gold production totaling around one million ounces of the yellow metal.

The Takeaway on Junior Miner Stocks and JNUG

To be completely honest, the JNUG ETF isn’t meant for every investor. If you hold it for too long, you’re likely to be exposed to index-tracking error, along with whatever risks come with the stocks it holds.

If your time frame is short and you don’t mind investing heavily in Canadian and Australian junior gold miners, then JNUG might be worth considering. Otherwise, look around for other ways to capitalize on movements in the gold price.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/jnug-isnt-best-gold-stock-play/.

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