Gold Miners ETF Stands Out

NEW YORK ( TheStreet) -- Since its Nov. 11 debut, the Market Vectors Junior Gold Miners ETF ( GDXJ) has advanced nearly 7% and drawn significant investor interest.

Already, this addition to the gold ETF funds universe has an average daily trading volume of more than 2.8 million shares.

Its popular large-cap predecessor, the Market Vectors Gold Miners ETF ( GDX), has a three-month average daily trading volume of 12.6 million shares.

GDXJ helps to provide investors exposure to junior gold miners with enormous potential for growth, while helping to minimize security-specific risk.

Because some of the companies in GDXJ's underlying portfolio companies have yet to generate material revenues and operate at a loss, trying to pick individual junior mining stocks can be like playing the lottery. GDXJ's portfolio includes 39 junior gold miners, reducing the impact that the failure of any single underlying component would have on the investment as a whole.

While the number of GDXJ's underlying components helps to temper the risk of this ETF, 46% of assets are dedicated to the fund's top 10 holdings. Investors and prospective investors should, therefore, familiarize themselves with GDXJ's top components. The performances of GDXJ's top five holdings, in particular, have a significant impact on the fund's trading.

The largest holding at 6.41% is Coeur d'Alene Mines ( CDE).

In addition to being a gold producer, Couer d'Alene is one of the world's largest silver companies. CDE currently has mines in Bolivia, Mexico, Chile, Argentina and a surface mine in Nevada. In addition to owning mining operations, CDE also has non-operating interests in several mines.

New silver mines Bolivia and Mexico are expected to increase cash flow in the upcoming months. According to a recent research report from Knight Capital Group, CDE's production of silver is expected to increase to 18 million ounces in 2009, up 50% from 2008. The opening of Kensington Gold Mine in 2010 is also expected to increase gold production.

The second largest holding at 5.65% is Hecla Mining ( HL).

Hecla Mining is involved in the discovery, acquisition, development, production, and marketing of silver, gold, lead, and zinc. With mines located in Idaho, Alaska and Mexico, HL produces and sells lead, zinc and bulk concentrates for custom smelters as well as unrefined silver and gold bullion bars for precious metals traders.

The purchase of Alaska's Greens Creek mine in April 2008 has contributed to increased silver production in 2009. Cash flow from operating activities increased 62% to $32.3 million in the third quarter of 2009, compared to $20 million for the second quarter of 2009. Due to its increased cash position, HL was able to repay all outstanding debt in the fourth quarter of 2009.

Silver Standard Resources ( SSRI) is the third largest holding at 5.38%.

SSRI focuses on the acquisition, exploration and development of mineral resource properties, primarily silver, gold, copper, lead and zinc in Argentina, Australia, Canada, Chile, Mexico, Peru and the United States. The company has interests in a number of global mining projects, including an alliance with Minco Silver to pursue silver opportunities in China.

High expenditures and uncertain cash flows make this company a high risk/reward holding. Investment in a new silver/tin mine in Argentina is expected to increase cash flows over the next year.

Rounding out GDXJ's top five holdings are Gammon Gold ( GRS) and New Gold ( NGD), with 4.97% and 4.56% allocations, respectively. GRS focuses on gold and silver interests in Mexico, while New Gold is involved in acquisition, exploration, extraction, processing, reclamation, and production of gold, copper, and silver.

While investment in "junior" companies, like those featured in the GDXJ portfolio, is inherently more risky than owning an ETF that tracks large-cap gold miners, this fund offers leveraged-like exposure to gold prices. As gold prices continue to soar, GDXJ still looks like an attractive opportunity.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion owns Market Vectors Gold Miners ETF and Market Vectors Junior Gold Miners ETF.

Don Dion is president and founder of Dion Money Management, 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.

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