How to Add Breadth to GDXJ

By Otto @ IKN

Your humble scribe has been spending the morning catching up with market things after a couple of days on the road and reading up on the whole GDXJ snafu. The basic problem is that the ETF is getting to the stage where it threatens to collapse in on itself due to its own excess gravity, black hole style. When money flows into the ETF, is has to distribute that around its component part shareholdings and as a lot of these juniors don’t have much market cap heft compared to the massive ETF NAV, we’re now at the stage where GDXJ holds more than 10% of stock in many of its components and gets close to the all-important 20% in some of them.

So trouble’s been brewing for a while and the VanEck solution, just announced, is to widen the number of companies included in the GDXJ universe. It’s the obvious move but due to the fact that the big player needs liquidity in holdings as well as size, we’re now into the weird-assed situation in which companies like Kinross, Pan American, Gold Fields, Buenaventura and a whole lot more like them are being added to the “juniors” precious metals ETF. Now you can call those companies a lot of names (and I often do), but “juniors” they are not.

Real juniors, ones outside the GDXJ universe, find themselves excluded due to size, float, price, market cap restrictions. That’s something I also understand, you can’t have GDXJ piling into a stock that trades 50k avg per day as its metrics will immediately go wappy. So here’s a potential solution for some or other intrepid brokerage or insto (and I’d wager it would be extremely profitable for the first footer too). The framework can be summed up in three simple stages:

1) Create a whole bunch of “mini junior ETF” vehicles. You could do it by geography, e.g.:

  • Canadian exploreco ETF
  • Canadian junior producer ETF
  • Asia exploreco ETF
  • Asia junior producer ETF
  • Latin America exploreco ETF, etc

Or you could do it by metal:

  • Copper exploreco ETF
  • Copper smallcap prodicer ETF
  • Uranium exploreco ETF, etc

2) Then choose a bunch of smallcaps from each junior sub-sector and weight your ETF. These in effect become bundles of stocks that together, under a larger (but still small) ETF umbrella get the necessary size to become attractive to GDXJ as a part of its holdings.

3) The result is that after time GDXJ gets to broaden its share base and the money filters down into the junior section, instead of money theoretically destined for the junior mining world filtering up into midcaps. The type of cash flow that would benefit the mining industry at a grassroots level.

FWIW, I could see Sprott doing this.

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