GDX versus GDXJ: 2 key ETFs to play gold in your portfolio



Two important ETFs

There are two dominant gold mining ETFs in the marketplace right now, the Gold Miners ETF (GDX) and the Junior Gold Miners ETF (GDXJ). The question you might be wondering is which one of the two would be better to own at this stage. We’ll analyze this in detail below.


What are GDX and GDXJ?

GDX focuses on large-cap names like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corp. (NEM), and Silver Wheaton Corp. (SLW). GDXJ focuses on junior or small-cap gold miners like Sandstorm Gold Ltd. (SAND) and Endeavour Silver Corp. (EXK).

GDX is designed to replicate the performance of the NYSE Arca Gold Miners Index, a benchmark that consists of publicly traded companies involved in gold mining.

Article continues below advertisement

GDXJ is a relatively new fund. It was established in November 2009. It has become quite popular and its total assets have increased to $800 million. It includes companies that generate at least 50% of their revenues from gold mining and silver mining. Junior miners generally operate small-scale mines and are involved in defining gold or silver ore bodies through drilling. Since most junior miners have yet to establish their ability to consistently generate revenues, they can be very risky investments.


As the above chart shows, the leverage of GDXJ is highest to gold prices. When prices rise, GDXJ rises the most and GLD the least. Year-to-date, GDXJ has outperformed GLD and GDX. But since November 2009, when GDXJ launched, GDXJ has underperformed both GLD and GDX.


Compared to physical gold–backed ETFs like GLD, GDX and GDXJ, on the one hand, offer more leverage and volatility. On the other hand, they’ll forfeit the diversification benefits that holding a commodity like gold offers in an overall portfolio.

Between GDX and GDXJ, GDXJ is much riskier proposition owing to the stages of the underlying stocks and no geographical diversification owing to one or two mine stocks. So, depending on your investment objective and risk appetite, you can go for either GDX or GDXJ.

We’ll now discuss factors that you should consider before investing in gold juniors in the next part of this series.


More From Market Realist