Exchange traded funds, such as the SPDR Gold Shares (NYSEARCA:GLD) and its low-cost counterpart, the SPDR Gold MiniShares (NYSEARCA:GLDM), make bullion investing more accessible to a broader swath of market participants.
There are other ways of accessing the yellow metal, namely with miners and the related ETFs. While individual bullion miners are often under-owned at the institutional, the relevant ETFs are among the largest industry funds on the market. For example, the Vaneck Vectors Gold Miners ETF (NYSEARCA:GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) have a combined $18 billion in assets under management.
In the ETF business, success often breeds more attempts at success, meaning issuers see investors embracing a particular fund genre and introduce copycat or geared equivalents. Gold miners are fertile ground for issuers looking to bring leverage to the miners. Just look at the Direxion Daily Jr. Gold Miners Bull 2X ETF (NYSEARCA:JNUG) and Direxion Daily Gold Miners Bull 2X ETF (NYSEARCA:NUGT).
NUGT and JNUG frequently rank among the most heavily traded leveraged ETFs, regardless of underlying asset, but that popularity isn’t an invitation for use of these products by a wide audience.
JNUG Facts: They’re Not All Fun
From a volatility perspective, ETFs backed by physical holdings of bullion, such as the aforementioned GLD and GLDM, and miners are very different animals. No, the gold-backed funds aren’t free of volatility, but not many assets compare to the turbulence that can come along with miners and that scenario is heightened by the combination of small caps and miners.
Just look at GDXJ, the fund JNUG is the levered equivalent of. Again, GDXJ has no leverage, but its three year-standard deviation is nearly 28%, or nearly 700 basis points above the comparable metric on the small-cap Russell 2000 Index.
So imagine the volatility that investors are subjected to when combining small caps, gold miners and leverage as does JNUG. Over the past three years, JNUG’s annualized volatility was a staggering 130.4%, or nearly 11 times that of GLD.
On that note, perhaps readers noticed something interesting in the names of JNUG and NUGT. These funds were born as triple-leveraged ETFs, but during the height of the March novel coronavirus market swoon, one that made funds like JNUG nearly untradeable, Direxion decided to reduce the leverage on 10 of its geared ETFs, including JNUG and NUGT. In fact, things got so crazy, the process of reducing that leverage was actually sped up.
Today, NUGT and JNUG are double-leveraged products. Lower leverage could mean less volatility, but due to the daily resetting involved with these and other geared funds, these remain trades, not long-term investments. That’s the case because all that daily resetting means geared ETFs can deviate wildly from their underlying indexes over long holding periods, delivering disappointing returns to those holding the funds for more than a couple of weeks.
Bottom Line: There’s More to Mull
If the volatility and lack of long-term viability doesn’t scare an investor from marrying rather than dating JNUG, perhaps the following will.
Seasoned gold investors know this, but many among the uninitiated do not. Spot gold prices and mining equities don’t move in linear fashion.
There are decent odds that there will be a year in which GLD rises and a fund such as GDX or GDXJ lag bullion. It happened in 2017 when GDXJ gained 8.2% compared to 12.8% for the bullion-backed offering.
Worse yet is what happens in the years in which gold prices sag. From 2014 through 2019, GLD closed lower on an annual basis three times. In each of those three years, GDXJ dramatically overshot the gold fund’s losses.
That’s further confirmation that JNUG is nothing more than a trade for a couple of days here and there.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.