The VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) and VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) are set for their quarterly rebalancing on March 19. This upcoming rebalancing event should further reduce the overlap between the two exchange-traded funds.
RBC analyst Wayne Lam expects the Junior Gold Miners ETF to keep adding companies. He noted that investors have become increasingly focused on the junior end of the GDXJ. Lam believes this means there is an increase in the number of firms that are eligible for inclusion. The GDXJ added almost 30 new junior gold companies last year, including 10 in the fourth quarter.
He also sees an emphasis on gradually reducing the overlap between the GDXJ and the GDX. Lam said the two ETFs overlap by almost 50% in the companies they include and 70% in market capitalization. The market cap overlap has declined from an average of 80% in 2018 and 2019.
To be added to the GDX, gold miners must have a market cap of $750 million and trade more than 50,000 shares over the last three months. They are deleted from the ETF if their market cap falls below $450 million or if fewer than 30,000 shares change hands over three months.
To be added to the GDXJ, companies must have a market cap of more than $150 million and a free float of more than 10%. They must also trade more than 250,000 shares over the last six months. Gold miners are deleted from the ETF if their market cap falls below $75 million or their free float dips below 5%. They are also deleted if fewer than 200,000 shares are traded over the last six months.
Additions and Deletions
Lam expects Northern Star Resources Ltd. (OTCMKTS:NESRF) to be deleted from the GDXJ because of its increased market cap after the recent Saracen merger. He looks for Skeena Resources Ltd. (OTCMKTS:SKREF), Marathon Gold Corp. (OTCMKTS:MGDPF), Jaguar Mining (OTCMKTS:JAGGF) and Calibre Mining Corp. (NYSEMKTS:CXBMF) to be added to the gold ETF. Lam said Kinross Gold Corporation (NYSE:KGC) could also be re-added to the ETF after it was deleted in the fourth quarter.
He predicts that Endeavour Silver Corp. (NYSE:EXK) and Gatos Silver Inc. (NYSE:GATO) will be added to the GDX. Gatos is eligible for inclusion above $12.67 per share with a $750 million market cap. Lam said Gatos could face headwinds due to its limited float, but it’s not unlike DRDGOLD Ltd. (NYSE:DRD), which is already in the GDX after having been added in June.
DRDGOLD has a 40% float. In the past, companies with smaller float sizes that were added to the GDX saw significant outperformance after the announcement that they were being included. The addition of Gatos to the GDXJ in the fourth quarter caused it to outperform the ETF by more than 78% in the month following its addition. DRDGOLD outperformed the GDX by 38% after it was added in the second quarter of last year.
Focus on Silver Miners Increased Since the Big Squeeze
Since the recent silver squeeze, Lam estimates that notional liquidity in junior silver miners has increased by an average of 60% quarter-over-quarter. That puts several of these companies within the liquidity threshold to be included in the GDXJ.
However, he believes several quarters of sustained trading liquidity may be required before the ETF considers them for inclusion. Silver firms that have surpassed the threshold this quarter could be eligible to be included at some point in the future. They include Aya Gold & Silver Inc. (OTCMKTS:MYAGF), GoGold Resources (OTCMKTS:GLGDF), Silver Mines (OTCMKTS:SLVMF) and Golden Minerals (NYSEAMERICAN:AUMN).
Details on the GDX and GDXJ Gold ETFs
According to Lam, the GDX has seen about $1.1 billion in outflows during the first quarter so far. Total assets under management in the GDX and GDXJ is down by about 17% quarter-over-quarter.
The GDX provides exposure to 51 gold and silver miners. Its top-10 holdings are Newmont Corporation (NYSE:NEM), Barrick Gold (NYSE:GOLD), Franco Nevada Corp. (NYSE:FNV), Newcrest Mining (OTCMKTS:NCMGY), Wheaton Precious Metals Corp. (NYSE:WPM), Agnico Eagle Mines (NYSE:AEM), Kirkland Lake Gold Ltd. (NYSE:KL), Kinross Gold Corp., Northern Star Resources and Anglogold Ashanti (NYSE:AU). This ETF tries to replicate the price and yield performance of the NYSE Arca Gold Miners Index.
On the other hand, the GDXJ provides exposure to 89 gold and silver miners and has $5.3 billion in net assets. The ETF’s top-10 holdings are Northern Star Resources, Pan American Silver Corp. (NASDAQ:PAAS), Gold Fields Limited (NYSE:GFI), Yamana Gold Inc. (NYSE:AUY), B2Gold Corp. (NYSEAMERICAN:BTG), Evolution Mining Ltd. (OTCMKTS:CAHPF), First Majestic Silver Corp. (NYSE:AG), Endeavour, SSR Mining Inc. (NASDAQ:SSRM) and Hecla Mining Company (NYSE:HL).
Gold and Silver Stocks on the Rise
Constituents of the GDX and GDXJ and the gold ETFs themselves rallied on Monday alongside the gold price. The yellow metal increased by more than 1%. In the GDXJ, Hecla and First Majestic each rallied more than 12%, while Gold Fields and Pan American Silver were each up by about 7%. In the GDX, Newcrest was up almost 6%, while Barrick Gold, Franco Nevada, Wheaton Precious Metals, Agnico Eagle Mines and Zijin Mining Group were each up less than 5%.
Craig Erlam of OANDA noted in an email that the U.S. dollar struggled on Monday, extending its losing streak to three days. He also said the dollar index is nearing a key support level that could change the near-term outlook. Although the index had been on a good run and key technical levels were being overcome, the recovery seems to have stalled.
“This would naturally be good news for gold, but with U.S. yields rising and still doing so at a decent pace despite pulling back today (Monday), the dollar should remain in favor at the expense of the yellow metal. Of course, if [Fed Chairman Jerome] Powell is very successful in playing down the risks of tapering over the next couple of days, that could change.”
Michelle does not own any of the stocks or ETFs in this article.