When billions of dollars flow into an ETF, it’s safe to assume this is because of its popularity among investors. The VanEck Vectors Junior Gold Miners ETF (GDXJ), which invests heavily in junior gold miners around the world, can attest to this kind of popularity, with some $1.5 billion flowing into it this year alone. Total assets jumped 60 percent in 2017 to over $5 billion.
At some point, however, as is the case with the GDXJ, asset growth can outpace an ETF’s underlying index. As BMO Capital Markets reported in mid-April, there will be a massive rebalance trade around the GDXJ on June 17, with changes already taking place. The index methodology is now permitting larger companies to be added, with significant demand for around 18 potential new additions, in conjunction with down-weighting of existing names.
The new index methodology allows the ETF’s largest company by market cap to be $2.9 billion, versus $1.8 billion under the current method, reports Investor's Business Daily. This puts it over the traditional $2.5 billion limit for small caps.
Impacts of the “Pre-Balance”
So what will the “pre-balance” and official rebalance in June mean for investors? For starters, it may mean less exposure to small-cap names. As I told Kitco News, this is a disruptor for small-cap gold stocks, which are getting knocked down for no reason when they have great fundamentals.
In addition, the ETF will need to sell $3 billion worth of its existing holdings to buy the new large-cap additions, which will create a massive funding trade significantly impacting existing names, BMO continues.
The number of companies the GDXJ can invest in starting in June will go from 48 to 69.