Trying to find untapped corners of the market has become increasingly challenging for exchange-traded funds (ETFs), but fund issuers have been up to the challenge.
One particularly inventive offering by Van Eck fills a conspicuous gap for gold bulls -- and the timing couldn't have been better.
There are several options for investors seeking exposure to world-class miners: there's Goldcorp (NYSE: GG), which I pointed out to readers in July. Market Vectors Gold Miners ETF (NYSE: GDX), is another one we've talked about. Smaller "junior" gold miners have been off the ETF radar, until now -- which is unfortunate, because they outshine all others in a gold rally.
Profits and Pitfalls
For years, many junior miners were more speculation bets than investments.
These smaller gold miners just don't have the stable income, generous lines of credit or huge gold reserves that their big brothers have. Many are still in the early exploration and development stages and don't have much to show for their efforts.
But what some may see as a handicap can act as the exact opposite in the growth department. Say a junior miner discovers a promising deposit in the Australian outback -- this can send shock waves through the market -- and juice profits for many years to come.
NovaGold Resources (NYSE: NG), for example, might not have much in the way of revenue yet. But the firm does have a 50% stake in Alaska's 27,000-acre Donlin Creek project. When the mine opens for business, it will yield 1.5 million ounces of gold each year for the next 12 years.
That future production stream (and the promise of more around the bend) has propelled the shares on a powerful +288% run this year.
Charts like this show NovaGold's incredible run (and believe me, it's not the only one) and it's why I'm so intrigued with junior miners.
From Speculation to A Compelling 'Buy'
Junior miners carry unique risks -- but the rewards can be great. And now, a new ETF gives you a chance to own more than three dozen of them...
The ETF is called Market Vectors Junior Gold Miners (Nasdaq: GDXJ), and its well-rounded portfolio should help minimize the risks associated with junior miners while maximizing their rewards.
GDXJ isn't the speculative bet that owning shares of an individual junior miner can sometimes be. The fund will still be somewhat volatile, but won't crash when a company has funding difficulties or trouble obtaining a permit somewhere. The fund holds junior miners operating in six different countries, so there's plenty of regional diversity, too.
These junior miners are leveraged to gold bullion prices -- just like the big boys. When prices go up or down, so go the shares. But it also wouldn't surprise me to see several of these junior miners get acquired or sign lucrative partnership deals with bigger firms. And that can send shares soaring.
At the Top of 2010's Watch List
They're not exactly making any more of the yellow metal these days -- even with the improved technology. New gold discoveries typically exceeded 40 million ounces each year during the mid to late-90s, according to Van Eck, GDXJ's sponsor. Now, the gold industry is lucky to find one quarter of that each year.
It stands to reason that when gold prices are climbing, these junior miners and their shareholders could have the most to gain. That's why these powerful little producers will be at the top of my watch list for 2010.
GDXJ is a nice addition to the ETF menu for gold investors. As I said, the fund takes some of the speculation out of owning junior miners, but its still suited to more aggressive investors looking for more octane.
The next time you hear somebody say a company is sitting on a potential goldmine -- keep in mind, these junior miners really are.