New "ETF" Provides Access
To "Junior" Gold/Silver Miners
Jeff NielsonThanks to "Bullion Bulls" contributor, Paul, for supplying me with a link to an exciting, new opportunity for U.S. investors to get access to Canadian "junior", precious metals miners - and the explosive, profit-potential which they represent.
June 12, 2009
This new, ETF is being offered by Van Eck Global. It is not their first precious metals mining-ETF, as they already have an ETF for gold miners: GDX (NYSE). However, what makes this new product unique is that it will be comprised solely of "junior" miners in the precious metals sector. While the press release simply refers to these companies as "junior miners", the vast majority of these companies are Canadian-based and Canadian-listed companies (on the TSX and "Venture" exchanges).
The press release, itself refers to these companies as offering (potentially) "very strong returns" and a "leveraged play" on the precious metals market - but does not explain how and why this is the case.
By coincidence, I recently published a commentary which directly explains precisely these attributes of "junior", precious metals miners (see "A Novice's Guide to Precious Metals, Part II: the miners").
To briefly summarize these facets of "junior" miners (and commodity-producers, in general), these companies generally have much more aggressive business models and growth profiles than the larger-cap miners - thus the potential for "very strong returns". However, in order to achieve these growth targets, "junior" miners typically operate with smaller profit-margins and/or higher debt-levels. This increases the risk of these companies, but simultaneously also increases their leverage.
For a more detailed explanation of these characteristics, please refer to my original commentary on this subject.
To clarify the title of this commentary, American investors already do have access to most Canadian "junior" miners. However, this comes primarily via "pink sheets" listings - a market which is shunned by more conservative investors, and those who lack a sophisticated understanding of these companies. Thus, this is the first mainstream vehicle for U.S. investors to invest in these companies, and also makes this market accessible for novices to this sector.
For Canadian investors, the opportunity is not quite as clear-cut. Canadians already can invest in many of these companies through their TSX listings - with the TSX being one of the world's largest exchanges, and the premier exchange in the world for mining investment.
The problem for Canadians wishing to invest in Van Eck's new ETF is that they must make their purchase in U.S. dollars. With the U.S. dollar on a clear, downward trajectory (and the Canadian dollar rising, inversely), holding U.S. dollars adds significant risk to this investment.
To some extent, the continuing decline in the U.S. dollar would be offset by a corresponding nominal increase in the unit price of the ETF. However, with most smaller investors paying a premium to convert their money into and out of U.S. dollars, and with the enormous volatility in U.S. currency, these currency costs could significantly erode the profit-potential of this vehicle - especially for shorter-term traders.
Nonetheless, for Canadian investors who lack familiarity and understanding of these smaller mining companies, the profit potential will likely significantly exceed the downside risk on the currency - especially for those with more distant investment horizons.
From a longer-term perspective, this ETF can be a great educational tool for those investors wishing to gain a better understanding of this market. Investors will have their own list of companies to research - as being particularly promising investments. While some of these companies will ultimately under-perform (as is the case with any fund), investors can look for common characteristics between these companies as indicators they should study, should they choose to embark on investing in these companies, individually.
For those who do not have much understanding of this sector, they may discover (to their surprise) that the business models of these companies are much more straightforward than sectors with which investors tend to be much more familiar.
Indeed, when I decided to begin managing my own portfolio, one of the reasons why I chose to focus on the mining sector was because I saw it as one of the easier sectors in which to quickly gain an understanding. The other, even more obvious reason was that it was clear to me that commodity-producers were in the early stages of a multi-decade "bull" market - with the "meltdown" which occurred last year being an interruption rather than end to this long-term trend.
I would encourage all investors who currently do not have exposure to Canadian,"junior" miners to seriously consider this ETF once it is officially launched. With the horrific losses which all of us sustained over the last year, here is an opportunity to reverse some of those losses with an investment vehicle which offers superior, potential returns to any direct investment in bullion, itself.
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