Investing directly in juniors or through the GDXJ ETF?

In a recent essay, Adam Hamilton of Zeallc.com pointed to the strong performance of the GDXJ Exchange Traded Fund since it was launched hardly one year ago by Van Eck. Especially last two months GDXJ is outperforming both the large cap focussed GDX and bullion. No better praise than that of a competitor.

Few days later, Alix Steel of Street TV focussed on five US listed stocks in the GDXJ:

Gold Stocks or Gold ETF: What's the Better Investment?

By Alix Steel 10/25/10 - 07:06 AM EDT

”NEW YORK (TheStreet ) -- As gold prices race towards $1,400 an ounce, investors scrambling to buy gold have many options.
Those looking for riskier exposure to the gold price are zeroing in on Market Vectors Gold Miners Junior (GDXJ_), a basket of small-cap miners. The ETF is up 31.9% year to date outperforming the gold price, which is up 23% in the same time period.”

(Reading further at) Gold Juniors or the GDXJ: What's the better investment. 

The article was published as she interviewed John Doody, editor of GoldStockAnalyst.com on that question: Gold Miners Junior ETF: A Good Investment? (video)

"Among the 5 US traded stocks in the GDXJ, the three silver plays are laggards within the ETF. Doody particularly dislikes CDE. On the contrary Allied Nevada and Novagold, two US-listed goldstocks in the GDXJ ETF are among the better performers " In the interview Doody further states that a 50% share of the GDXJ Etf capitalisation are Canadian miners, many of which are listed on the AMEX pink sheets, with low average volumes.

So rather than focussing on US-listed stocks in the GDXJ, we can have a better understanding of their strategy when checking the Canadian listed stocks. A wide selection of Canadian precious metal miners is monitored by Gold Miner Pulse. For those stocks, several fundamental characteristics are listed, such as Market Cap/Oz of Gold or Silver equivalent, average grade, total reserves and resources and their exploration quality as the repartition between reserves and resource categories, as was discussed in an earlier blogpost. 

I crosschecked the GDXJ and GDX components with the Gold Miner Pulse database:

Canadian miners followed by Gold Miner Pulse are about 36% of the market cap of the GDX Etf. For the GDXJ that amounts to 15 different stocks, for a total of 38% of its market cap. Three stocks are selected by both ETF’s. Those are Gammon Gold, Great Basin Gold and Silver Standard Resources. Note: In spite of its focus on Gold Mining Juniors, quite a few of the GDXJ components are mainly mining for silver.

Whoever monitored recent news in M&A in the mining sector, immediately notices that the GDXJ components contain quite a few recent acquisition targets. (For example ‘Andean Resources’). The big jump of this quote has been made and an exit of those positions is imminent. In this respect it’s better to invest in the GDXJ than trying to copy their portfolio (it is public) and to constantly fall behind the curve

Further analysis of the GDXJ components of the Gold Miner Pulse list, learns that mainly larger juniors are on board. Among the 15 GDXJ components, only two have a market cap below 500 M$. No less than five have a market cap above 2 billion USD, moreover their weights in the basket are heavier: those five stocks make up 20% of the GDXJ or over half of the 38% of the Gold Miner Pulse list.

Who really wants to chase promising small exploration companies, with high profit potential but comparable risk, is not too well off with GDXJ. However, the analysis and the follow up needed for a winning junior selection is beyond the efforts an average investor is willing to do. Flawed selection, bad timing, holding on to losses and an unsuccessful exit-strategy: these turn out to be “the minefield of junior mining”. Eventually the GDXJ is the best option for many investors.