Anyone who keeps an eye on the GDXJ will tell you that there has been a lot of selling going on lately in some of the ETF’s holdings. If you own shares in the ETF itself it hasn’t been really bad but for investors who own some of the particular stocks of the ETF it’s been a bit of down hill ride. With some stocks have dropping by as much as 30% over the past month its been a bit of hard on investors nerves. The Junior Gold Miners ETF (GDXJ), down about 5.6% this week. Among components of that ETF with the weakest showing for the week were shares of Continental Gold (CNL.CA), lower by about 15.3%, and shares of Premier Gold Mines (PG.CA), lower by about 11.4% on the week. Undoublty there has been long faithful holders of some of the stocks cashing in and maybe waiting it out till the dust settles and things turn around.
So what’s causing this sell off? Well the ETF is comprised of a whole bunch of different junior mining companies. It even has some stocks that are not classified as junior as some are more in the mid-tier section as they are small producers. The ETF holds different percentages of stock in various junior mining companies. What’s happening now is that the fund is getting too much money invested in it and now it has to re-allocate this money by adding different companies to the fund. Since early 2016, assets in the fund shot up from a little more than $1 billion to $5.4 billion currently. This added money puring into the fund has nearly doubled the ETF price from $19.80 at the start of 2016 to $36.71 today which is a gain of almost 90%.
The ETF has gotten so big that it now owns giant stakes in some of its underlying holdings, three-quarters of which are Canadian companies. All this extra money has created a dilemma for the fund as its holdings surge above 10 percent of some of the companies it owns. Over the past 12 months, GDXJ has surged 15 percent, outperforming VanEck Vectors Gold Miners, which tracks bigger producers of the metal.
In order for the fund to remain compliant with regulators etc. it needs to sell off a certain amount of shares from various holdings because if they own to many shares the fund can be classified as being a insider of that particular company and would have another issue of reporting holdings etc. with different tax jurisdictions. So to keep things as simple as possible the fund has decided to sell off various assets as it looks to buy into other assetts.
(At present there are 10 Canadian companies that the ETF owns where its ownership percentage is more than 18%. These are holdings it is starting to liquidate.)
What this means in the end is that some stocks holders are seeing their stocks sell off for no apparent reason aside that fact that the fund needs to liquidate and other stock holders are seeing the opposite as the fund is starting to buy various other stocks with all this money that has come into the fund.
On thing for certain though is that looking at all this extra money that is coming into this fund tells you one thing and that is that there are a lot of big time investors and funds with lots of big money who see a lot of value and growth in the junior and mid tier mining sectors and this all bodes well for the junior miners. As some would say, “A rising tide lifts ALL boats.”
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