GDXJ Is No Longer My Favorite Gold Miner ETF, SGDJ Takes The Cake
Apr. 2, 2015 9:59 PM • sgdj
- GDXJ had been my favorite gold miner ETF for a long time, as it gave investors exposure to lots of small cap gold and silver companies and offered great performance.
- Sprott Asset Management has just launched its own junior miner ETF, known as the Sprott Junior Gold Miners ETF.
- SGDJ is comprised of small cap gold and silver stocks that are based on companies with the strongest relative revenue growth and price momentum.
- SGDJ has a balanced weighting across the entire portfolio of assets, just like GDXJ; but SGDJ contains a more concentrated mix of quality companies.
- I'm really excited about this new offering by Sprott, and I would have to give the edge to SGDJ in terms of my top overall gold miner ETF as of today.
For the longest time, my favorite ETF in the precious metals sector had been the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ ). It provides exposure to many high-quality junior gold and silver companies, and it doesn't overweight the index at the top with a select few names, like so many other ETFs do.
GDXJ is a riskier play than something like the Market Vectors Gold Miners ETF (NYSEARCA:GDX ), as GDX is comprised of the largest companies in the precious metals arena. But GDXJ offers performance advantages when gold increases, as it contains higher-beta stocks.
If you take a look at the performance of GDXJ compared to GDX, you will see how much further GDXJ increased when gold was in its runaway bull market in 2010-2011. Of course, there is a flip side to this coin, as GDXJ far underperforms when gold declines, due to its exposure to these smaller cap/riskier companies.
If we zoom in on the last 6 months or so, you can see this in action. And it's not a small difference either - a 25% decrease in GDX, compared to a 41% decrease in GDXJ. That's the additional risk that is on the table. Investors need to be aware of this if they purchase GDXJ or any other junior miner ETF in the sector.
Which brings me to the latest news. Sprott Asset Management has just launched its own junior miner ETF, known as the Sprott Junior Gold Miners ETF (NYSEARCA:SGDJ ). Anybody who has been in the gold sector for a while is familiar with the Sprott name, as its billionaire founder Eric Sprott is considered a legendary investor when
it comes to precious metals, at least to some.
Sprott launched its first gold miner Exchange Trade Fund last year, with the introduction of the Sprott Gold Miners ETF (NYSEARCA:SGDM ). So Sprott is now offering two products that directly compete with the largest gold miner ETFs, those being GDX and GDXJ.
I'm not crazy about SGDM, though, as it's too heavily weighted at the top. It is comprised of mid-large cap/lower-risk companies in the gold sector, just like GDX; however, I still much prefer GDX. But I must say that this new junior miner ETF offered by Sprott has dethroned GDXJ from the top of my list in terms of favorite gold miner ETF. I will get more into the reasoning for that in a bit, but first let me just give investors a little more detail on SGDJ.
Sprott Asset Management and Zacks Index Services co-developed the stock selection and weighting criteria for SGDJ, and SGDJ is designed to track the Sprott Zacks Junior Gold Miners Index. This Index is comprised of small-cap gold companies that are listed on major U.S. and Canadian exchanges. It can also include, to a lesser degree, junior silver companies that meet the criteria below.
The Index identifies between 30 to 40 junior gold/silver stocks with market caps between $250 million and $2 billion. Sprott and Zacks wanted to try, as much as possible, to exclude companies below $250 million, as "these are mostly very early-stage exploration companies whose historical success rate is low."
The Index emphasizes companies with the strongest relative revenue growth and price momentum. According to Sprott, the reasoning for this is:
Revenue growth has been a strong indicator of how a junior miner is progressing towards becoming an emerging or intermediate producer. Stock price momentum can identify leadership within the sector and may be an especially meaningful factor when evaluating exploration companies that are not yet generating revenue. Stronger price momentum of junior gold companies may be driven by a number of potential factors such as a new discovery, mine development or a joint venture.
The revenue growth factor is based on quarterly revenue growth, and measured on a year-over-year basis. Companies with the highest revenue growth scores receive a higher weighting in the Index, while slower revenue growers are given less weighting. The same goes for momentum - companies with the strongest relative stock price momentum scores receive a higher weighting, while companies with weaker price momentum receive a lower weighting.
The Index is rebalanced on a semi-annual basis (November and May) to ensure that the latest company results are reflected in its composition and weighting.