GDXJ VanEck Junior Gold Miners ETF

Although commodity prices have been under pressure for much of 2012, many have come back in recent weeks thanks to a sluggish economy and extremely accommodative policies from central banks around the world. With the promise by the ECB for unlimited bond purchases and speculation over more QE in America, this trend doesn’t appear to be ending anytime soon, putting hard assets and producers of commodities in the spotlight once again.

In light of this trend, the recent launch by Global X in the commodity market could be of some interest to metal-focused investors. The company recently released its newest fund, the Junior Miners ETF (JUNR) which looks to give broad exposure to pint-sized firms in the mining world from around the globe (see Could This Be The Year For These Mining ETFs?).

This new fund will contain just under 100 securities and charge investors 69 basis points a year in fees for its services. The product will track the Solactive Global Junior Miners Index which is a benchmark of small cap mining firms that are engaged in producing, smelting, or refining any of, but not limited to, the following materials: coal, copper, gold, iron, nickel, silver, titanium.

The benchmark is pretty well spread out, as the top holding only accounts for 2.6% of assets, suggesting a very diversified portfolio. In terms of a national breakdown, Canada takes the top spot at 34% of assets and it is closely trailed by Australia at 26%. Beyond these two, the U.S. (18.4%), the UK (7.3%), and China (4.3%) round out the top five, suggesting that a host of nations from around the globe receive sizable chunks in the portfolio.

Why Junior Miners?

According to Global X research, small cap miners tend to benefit in a rising price environment as large caps seek to shore up their supply chains. Buying up small caps in mergers or acquisitions is arguably easier than exploring for new mines and obtaining all the necessary permits, and actually getting the mine to produce as well (see more in the Zacks ETF Center).

Furthermore, large cap miners could see some competition on this M&A front thanks to sovereign wealth funds, steelmakers and pension funds which could all look to expand into the small cap commodity market in order to provide long term growth and more diversification for a portfolio. This could help to bid up shares of small cap mining stocks, making them trade at favorable multiples in the near term.

Lastly, small caps tend to be more volatile than their large cap counterparts and they also tend to trade as a leveraged play on the underlying metals. So, for investors who believe that metal prices are on the rise, a closer look at small caps is the logical choice for outsized returns going forward (see Silver ETFs Outshine Gold).

ETF Competition

Luckily for Global X, the fund will face little in terms of competition from other ETF issuers, at least for now. However, it should be noted that there are a few ETFs that are relatively close to JUNR in their focus, although none are identical.

First up is the PowerShares S&P SmallCap Materials Portfolio (PSCM), a relatively unpopular fund that targets the broad materials market. The ETF is cap-weighted and while much of the portfolio is outside the mining space, the product does have a heavy focus on micro cap securities.

This strategy has a great deal of potential, at least when compared to the large cap counterpart in the space, XLB. PSCM has thoroughly crushed its large cap State Street counterpart over the past year, beating out the fund by over 1,000 basis points in the time frame, suggesting that small caps certainly have the ability to outperform in today’s market environment.

Meanwhile, another fund that should be of interest to investors considering JUNR is the Junior Gold Miners ETF (GDXJ) from Van Eck. The fund is extremely popular with over $2.6 billion in AUM and over 3.5 million shares traded on a daily basis. Clearly, this junior mining product was in mind for Global X when they first considered bringing JUNR online (see Has the Junior Gold Mining ETF Lost Its Luster?).

Unfortunately, the broad gold mining market has been extremely unfavorable over the past 52 weeks, forcing GDXJ to underperform its large cap counterpart, GDX, by a pretty wide margin. However, the reverse has also been true over shorter time frames, as gold prices have come back in August and September.

So while JUNR isn’t likely to outperform broad metal mining ETFs that are focused on large caps—like XME-- all the time, the new Global X fund seems poised to lead in bull market runs. So, for investors who are bullish on the mining market, JUNR could be an interesting pick as it offers global, diversified exposure to an often overlooked segment of the materials world (see Bet on a Gold Comeback with the Gold Explorers ETF).

Just remember, the product is likely to see more volatility than its large cap counterparts, suggesting that it probably isn’t for the faint of heart, nor is it likely a good place to stash cash in bear markets either.  Instead, it could be a high risk, high reward play for investors seeking more materials exposure who believe that continued balance sheet expansion and intervention by central banks around the globe will help to push hard assets back to lofty heights once again to end the year.

(Investors should note that this fund is a conversion from the Global X S&P/TSX Venture 30 Canada ETF. That product debuted in March of 2011 but underwent a name change and a strategy adjustment in order to turn it into the junior miner product that we have today.)

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MKT VEC-GOLD MI (GDX): ETF Research Reports
 
MKT VEC-JR GOLD (GDXJ): ETF Research Reports
 
GLBL-X JR MINER (JUNR): ETF Research Reports
 
SPDR-MATLS SELS (XLB): ETF Research Reports
 
SPDR-SP MET&MIN (XME): ETF Research Reports
 
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