NEW YORK (
) -- The launch of the
Market Vectors Junior Gold Miners ETF
Wednesday morning is an exercise in perfect timing. Gold prices continued to rise to record highs in the U.S. and London Wednesday as the dollar weakened for the third day in a row.
The new ETF, which Market Vectors filed to launch back in May, will track a basket of "junior" gold mining companies.
The launch of the new fund comes in the wake of Market Vectors' popular
Gold Miners ETF
, which tracks larger gold mining companies. GDX, which was launched in 2006, currently has $5 billion in assets.
As the dollar weakens and investors continue to worry about inflation, gold ETFs have become increasingly popular. According to recent data from the National Stock Exchange, gold bullion funds like
continue to attract assets. Year to date, GLD has seen a net inflow of $12.5 billion, and the fund is currently the second largest ETF.
GDXJ tracks the Market Vectors Junior Gold Miners Index, which seeks to provide investors with exposure to a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenue from gold and/or silver mining. Companies included must hold real property that has the potential to produce at least 50% of the company's revenue from gold or silver mining when developed, or primarily invest in gold or silver. The top three holdings in the fund are
Coeur d'Alene Mines
Silver Standard Resources
Since GDXJ tracks a group of small mining firms, the fund will be subject to different risks than the large-cap GDX. Many of the companies included in the underlying portfolio, such as SSRI, are still in the development stage and have yet to generate material revenues. Because these companies have lower trading volume and less liquidity than their large-cap peers, GDXJ will be subject to more volatility than GDX.
Gold continues to be both an attractive hedge against inflation as well as a good way to diversify a broad portfolio. Gold bullion funds like GLD,
iShares Comex Gold
track a physical stockpile of gold, and are thus highly correlated to gold prices. (
to view a guide of the different types of gold and silver ETFs.)
Funds like GDX and GDXJ offer less direct exposure to gold because they own a portfolio of stocks in gold mining companies. Although the performance of the underlying components is tied to the price of gold, other business concerns, such as fixed costs, also influence pricing.
Year to date, equity-based GDX has outperformed bullion-based GLD. GDX has risen 46.58%, while GLD has gone up 25.28%. This difference in performance, however, can cut both ways. If gold prices fall, owners of GLD may feel less pain than investors in GDX and GDXJ.
With gold prices soaring, the launch of Market Vectors' new Junior Gold Mining ETF could not come at a better time. Investors should consider how long they want to have gold exposure and what their risk tolerance is before they select a gold fund.
In the short run, gold miner ETFs like GDX and GDXJ still have the potential to outperform. For long-term holdings in a diversified portfolio, however, investors may still be better off choosing a fund like GLD.
-- Written by Don Dion in Williamstown, Mass
At the time of publication, Dion was long iShares COMEX Gold Trust and Market Vectors Junior Gold Miners ETF.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.