Last week ETF.com reported that the VanEck Vectors Junior Gold Miners ETF (GDXJ) may have become too big for its index, the MVIS Global Junior Gold Miners Index. The $5.4 billion exchange-traded fund owns giant positions in its underlying holdings, putting it at risk of violating certain Canadian and U.S. regulatory thresholds.
To avoid crossing those thresholds, the ETF bought up stocks of companies that aren't in its index — creating a significant divergence between the ETF components and the index components. Last Thursday, VanEck (which runs both the ETF and index) acknowledged the divergence by announcing it would broaden the scope of the index and include many more gold miner stocks in the portfolio at the next rebalance date.
Dramatic transformation for GDXJ
According to a press release from the firm, starting on June 17, "companies ranking between 60 percent and 98 percent (currently between 80 percent and 98 percent) of the full market capitalization [of the investable gold miner universe] qualify for inclusion in the MVIS Global Junior Gold Miners Index."
Translated into market-capitalization terms, that means the market-cap range for new index components may expand from $75 million–$1.6 billion to $75 million–$2.9 billion, according to a Scotiabank report published April 13.
The changes to the index will result in a dramatic transformation of GDXJ's portfolio. Scotiabank estimates that, after the changes, there could be 23 new additions to the index (four of which are already in the ETF). Those 23 new additions could represent 60.8 percent of the new index portfolio.
To fund the buying of the new index additions, the existing index components will likely face steep selling. The Scotiabank report says that GDXJ "could have to sell $2.6B across existing index constituents," which represents "2.5 percent to 8 percent of the total shares outstanding of each existing index constituent."