Here’s What Investors Need to Know About the GDXJ Rebalancing

Some seasoned market watchers believe that the GDXJ rebalancing could be an opportunity for savvy investors to profit.

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The popular VanEck Vectors Junior Gold Miners ETF (ARCA:GDXJ), better known as GDXJ, will be rebalanced on Friday (June 16), and some market watchers believe it could be a buying opportunity. 

“Don’t be afraid of this, use it as your opportunity,” Frank Holmes of US Global Investors (NASDAQ:GROW) said recently. “Because some of these stocks have been sold down indiscriminately when they are reporting phenomenal fundamentals. The retail investor … and the smart institutional investor can pick away on some of the stocks.”

GDXJ is run by investment management firm VanEck, and it was designed to track the MVIS Global Junior Gold Miners Index (MVGDXJ), which follows the overall performance of small-cap companies involved in gold mining and exploration. Lately, however, GDXJ has begun to deviate from that index.

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Changes began back in April, when ETF.com reported that GDXJ had gotten too big for MVGDXJ. Essentially, the ETF had become so large that it had “giant stakes in its underlying holdings.” That was a problem for a number of reasons, one of which was that it was struggling to conform with IRS diversification requirements.

To fix that issue and others, VanEck allowed the ETF to take on holdings that were not constituents of MVGDXJ. Then, the firm announced that after June 16, “companies ranking between 60 percent and 98 percent (currently between 80 percent and 98 percent) of the full market capitalization [of the investable gold miner universe would] qualify for inclusion in the MVIS Global Junior Gold Miners Index.”

As The Globe and Mail recently explained, in layman’s terms that means after that point GDXJ will be able to buy gold stocks whose market caps range from $75 million to $2.9 billion; that’s up from the previous range of $75 million to $1.6 billion.

The catch is that to free up cash, the ETF will have to sell more than 50 percent of its shares in the smaller gold companies it currently holds. Unsurprisingly, that news has led to instability in the market — GDXJ shares took a steep fall after the rebalancing was announced, and since then companies held by the ETF have faced volatility.

“Something I’ve learned is that, yeah, it’s great to get [into GDXJ,] but when they push you out, it can be very difficult for a company,” Patrick Donnelly, president of First Mining Finance (TSXV:FF), told the Globe. Duncan Middlemiss, president and CEO of Wesdome Gold Mines (TSX:WDO), echoed that sentiment.

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RBC Capital Markets has identified 17 stocks with a high likelihood of being added to the ETF, including Tahoe Resources (TSX:THO,NYSE:TAHO), Coeur Mining (NYSE:CDE) and Yamana Gold (TSX:YRI,NYSE:AUY). The firm has also named three stocks it believes could be pushed out. That said, there’s been no official word yet on which companies are in and which are out.

So what’s an investor to do? As mentioned, many seasoned market watchers believe the rebalancing is a buying opportunity for investors. Holmes, for example, identified Klondex Mines (TSX:KDX,NYSEMKT:KLDX) and Wesdome as two gold companies that are doing “exceptionally well,” but have been knocked down by fund flows.

Even Donnelly admitted that it’s a chance to profit. “It’s almost like the salmon run is coming, in terms of investors,” he said. “It’s an opportunity to get some quality names for a good price.”

After the rebalancing, the path forward is less certain. After all, as many market watchers have pointed out, once it takes place the GDXJ will no longer be as focused on junior gold stocks as it once was. What’s more, if it continues to grow its focus could be diluted further — as CNBC points out, this isn’t the first time the GDXJ universe has been expanded.

What do you think? Will GDXJ still be an appealing option after the rebalancing? And will you be taking advantage of it to pick up stocks? Let us know in the comments!

Don’t forget to follow us @INN_Resource for real-time updates.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

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