Although commodity prices have been under pressure for much of
2012, many have come back in recent weeks thanks to a sluggish
economy and extremely accommodative policies from central banks
around the world. With the promise by the ECB for unlimited bond
purchases and speculation over more QE in America, this trend
doesn't appear to be ending anytime soon, putting hard assets and
producers of commodities in the spotlight once again.
In light of this trend, the recent launch by Global X in the
commodity market could be of some interest to metal-focused
investors. The company recently released its newest fund, the
Junior Miners ETF (
JUNR
)
which looks to give broad exposure to pint-sized firms in the
mining world from around the globe (see
Could This Be The Year For These Mining ETFs?
).
This new fund will contain just under 100 securities and charge
investors 69 basis points a year in fees for its services. The
product will track the Solactive Global Junior Miners Index which
is a benchmark of small cap mining firms that are engaged in
producing, smelting, or refining any of, but not limited to, the
following materials: coal, copper, gold, iron, nickel, silver,
titanium.
The benchmark is pretty well spread out, as the top holding only
accounts for 2.6% of assets, suggesting a very diversified
portfolio. In terms of a national breakdown, Canada takes the top
spot at 34% of assets and it is closely trailed by Australia at
26%. Beyond these two, the U.S. (18.4%), the UK (7.3%), and China
(4.3%) round out the top five, suggesting that a host of nations
from around the globe receive sizable chunks in the portfolio.
Why Junior Miners?
According to
Global
X research
, small cap miners tend to benefit in a rising price environment as
large caps seek to shore up their supply chains. Buying up small
caps in mergers or acquisitions is arguably easier than exploring
for new mines and obtaining all the necessary permits, and actually
getting the mine to produce as well (see more in the
Zacks
ETF Center
).
Furthermore, large cap miners could see some competition on this
M&A front thanks to sovereign wealth funds, steelmakers and
pension funds which could all look to expand into the small cap
commodity market in order to provide long term growth and more
diversification for a portfolio. This could help to bid up shares
of small cap mining stocks, making them trade at favorable
multiples in the near term.
Lastly, small caps tend to be more volatile than their large cap
counterparts and they also tend to trade as a leveraged play on the
underlying metals. So, for investors who believe that metal prices
are on the rise, a closer look at small caps is the logical choice
for outsized returns going forward (see
Silver ETFs Outshine Gold
).
ETF Competition
Luckily for Global X, the fund will face little in terms of
competition from other ETF issuers, at least for now. However, it
should be noted that there are a few ETFs that are relatively close
to JUNR in their focus, although none are identical.
First up is the
PowerShares S&P SmallCap Materials Portfolio (
PSCM
)
, a relatively unpopular fund that targets the broad materials
market. The ETF is cap-weighted and while much of the portfolio is
outside the mining space, the product does have a heavy focus on
micro cap securities.
This strategy has a great deal of potential, at least when
compared to the large cap counterpart in the space,
XLB
. PSCM has thoroughly crushed its large cap State Street
counterpart over the past year, beating out the fund by over 1,000
basis points in the time frame, suggesting that small caps
certainly have the ability to outperform in today's market
environment.
Meanwhile, another fund that should be of interest to investors
considering JUNR is
the Junior Gold Miners ETF (
GDXJ
)
from Van Eck. The fund is extremely popular with over $2.6 billion
in AUM and over 3.5 million shares traded on a daily basis.
Clearly, this junior mining product was in mind for Global X when
they first considered bringing JUNR online (see
Has the Junior Gold Mining ETF Lost Its Luster?
).
Unfortunately, the broad gold mining market has been extremely
unfavorable over the past 52 weeks, forcing GDXJ to underperform
its large cap counterpart,
GDX
, by a pretty wide margin. However, the reverse has also been true
over shorter time frames, as gold prices have come back in August
and September.
So while JUNR isn't likely to outperform broad metal mining ETFs
that are focused on large caps-like
XME
-- all the time, the new Global X fund seems poised to lead in bull
market runs. So, for investors who are bullish on the mining
market, JUNR could be an interesting pick as it offers global,
diversified exposure to an often overlooked segment of the
materials world (see
Bet on a Gold Comeback with the Gold Explorers
ETF
).
Just remember, the product is likely to see more volatility than
its large cap counterparts, suggesting that it probably isn't for
the faint of heart, nor is it likely a good place to stash cash in
bear markets either. Instead, it could be a high risk, high
reward play for investors seeking more materials exposure who
believe that continued balance sheet expansion and intervention by
central banks around the globe will help to push hard assets back
to lofty heights once again to end the year.
(Investors should note that this fund is a conversion from the
Global X S&P/TSX Venture 30 Canada ETF. That product debuted in
March of 2011 but underwent a name change and a strategy adjustment
in order to turn it into the junior miner product that we have
today.)
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MKT VEC-GOLD MI (GDX): ETF Research Reports
MKT VEC-JR GOLD (GDXJ): ETF Research Reports
GLBL-X JR MINER (JUNR): ETF Research Reports
SPDR-MATLS SELS (XLB): ETF Research Reports
SPDR-SP MET&MIN (XME): ETF Research Reports
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