The price of gold has climbed over 15% in 2020 and over 36% in the last 12 months. For investors who are looking for a flight to safety, gold seems like a great bet. So why is the exchange-traded fund Direxion Daily Jr. Gold Miners Bull 2X ETF (NYSEARCA:JNUG) down over 87% for the year?
The simple truth is that with JNUG stock, more is not more. In fact, more may actually be less.
This Is Not Your Typical ETF
JNUG is a leveraged ETF. This is a sophisticated trading vehicle that quite frankly is best left to experienced traders. The most important reason for this is that the fund uses financial derivatives and debt to boost the returns of the underlying index.
The benchmark index for the JNUG ETF is the MVIS Global Junior Gold Miners Index (MVGDXJ). In the case of JNUG, the goal is to deliver performance that delivers 200% or -200% of the return of its benchmark index in a single day.
The single day is an important point. The fund is not meant to be a buy-and-hold instrument. And it also means that when the market for the underlying securities become volatile, this index will carry even more risk. With JNUG, the underlying securities are made up of junior gold miners. These are among the riskiest stocks in an already risky sector.
Plus, as my InvestorPlace colleague Josh Enomoto points out, you’re paying for the privilege of owning shares in JNUG stock. The expense ratio of 1.12% is nearly three times the average expense ratio for an ETF. As Enomoto notes, that kind of an expense ratio means you really have to be right a lot.
With JNUG Stock, Volatility Is Not Your Friend
In the last six months of 2020, JNUG scored an impressive gain of over 93%. The ETF climbed even further into mid-February. However, in March, things fell off a cliff. There were several reasons for this.
First, as the market selloff began, some investors needed to sell gold to cover other losses. Gold also didn’t get the bounce that many investors may have expected from the Federal Reserve announcing an additional interest rate cut. And finally, there was an undeniable flight to cash. As in cold hard cash, which is still seen as the biggest safe haven.
All of this meant that many gold stocks and the spot price of physical gold were extremely volatile. Leveraged ETFs like JNUG get crushed in a volatile market. One reason for this is because the JNUG ETF uses leverage, that leverage has to be rebalanced every day.
The long and short of it is that with leveraged ETFs, the more volatile the benchmark, the more value tends to get lost over time. And this is true even if the benchmark index ends up flat for a given year. This is because even in a flat year, the benchmark index is likely to have drastic moves up and down. And if a leveraged ETF like JNUG moves within 10 points every two days for a period of 60 days, investors can lose 50% of their investment.
This is a Gamble, Not an Investment
Let me be clear, if JNUG didn’t make somebody money it wouldn’t exist. However, this is a case where the average investor should stay far away from JNUG stock.
I wrote earlier that with this leveraged ETF more can actually be less. And that’s the reason why I see JNUG as such a gamble.
It’s possible that you can get an outsized return, but average investors are simply taking on too much risk. If you want to invest in the junior mining stocks, you would be better off buying them directly. For example, two of the underlying securities of the MVGDXJ are Kinross Gold Corporation (NYSE:KGC) and B2Gold (NYSEAMERICAN:BTG), which are up 34% and 35% on the year respectively.
Investing in gold should help you sleep at night. But when you invest in JNUG stock, you have to be alert and on your toes all day long.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.