Bullish on gold and looking for ways to play it? There are many, but for the average reader, they should take a pass on the Direxion Junior Gold Miners Bull 3X ETF (NYSEARCA:JNUG). For most investors, they are not prepared for the type of action that can be associated with leveraged exchange-traded funds.
Unfortunately, JNUG is one of those leveraged ETFs. That doesn’t mean investors can’t use it, but it’s better served as a trading vehicle than an investment vehicle. That’s assuming it’s used at all.
The Danger with JUNG
When we talk about leveraged ETFs, it’s usually double or triple exposure. On paper, JNUG should give us three times the movement we get in junior gold miners, a volatile group to begin with. However, the risks here must be discussed. Forget JNUG for a minute. Any triple-levered ETF presents plenty of risk. The first risk is simple: Leverage.
We always hear about the risks of trading on margin or using leverage. When we’re hitting winners, margin and leverage feels great, because our gains are bigger. But that knife cuts both ways. When the losses start to mount, leverage is our biggest enemy.
Think about a 25% drawdown. It’s not ideal, but certainly not unheard of for most assets or stocks. On its own with no leverage, stocks can recover from a 25% drop. With triple leverage though, that 25% loss balloons up to a 75% loss, an almost unrecoverable decline.
The second risk for leveraged ETFs is decay. Take almost any one of these stocks — JNUG included — and plot them on a multi-year weekly chart. You’ll see that over the long term, these ETFs decay and have almost no value to them compared to where they were several years ago.
That said, JNUG and other triple-leveraged ETFs can make big moves in the short term. So investors who feel comfortable using them should only consider them as a trade, not an investment.
If investors like a triple-levered bullish ETF on gold, they have to at least like gold. For that, there are a few reasons why owning the yellow metal makes sense.
First, central banks around the world — including the Federal Reserve — are printing money like crazy. The various stimulus efforts being deployed around the world in an effort to fight the economic ramifications of the novel coronavirus should be a boon for gold. Second, gold offers a nice diversification away from equities and bonds, and helps spread the risk of one’s portfolio.
Gold initially fell during the stock market selloff in March. But that decline wasn’t driven by fundamentals, and was likely driven more by pandemonium and the forced liquidation of assets (whether performing well or not). For gold, the fundamentals are simple: With the Fed and global central banks printing cash, lowering interest rates and doing seemingly everything they can think of, gold should climb.
There are legitimate reasons to be bullish on gold, but also legitimate reasons to avoid using JNUG stock. So what should investors do? Thankfully, there are plenty of alternatives.
The most direct way of buying gold in the financial markets (aside from owning physical gold) is through the futures market. That gives investors a direct outlet to purchase the yellow metal. However, unless investors have a solid understanding of the futures market and a sizable account, it should probably be avoided.
That leaves “paper gold” options like the SPDR Gold Trust ETF (NYSEARCA:GLD). Arguably the most popular way for investors to play the moves in gold, this big ETF is quite liquid and does a decent job of tracking gold prices.
For those that want exposure to the miners, they can consider the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX). This fund makes up some of the largest gold miners out there and is a great way to play the group rather than pick individual holdings.
Finally, for investors who want the unlevered version of JNUG, they can simply stick to the junior miners. That’s via the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.