Leveraged Gold Miner ETF Breaks Down
The VanEck Vectors Junior Gold Miners ETF (GDXJ) prominently made headlines here at ETF.com during the past week for running into "too big for its index" issues. Now another gold miner exchange-traded fund is in the news after facing different, but related, problems.
After the market closed last Thursday, Direxion announced that it would be suspending creations of its Daily Junior Gold Miners Index Bull 3x Shares (JNUG), a leveraged product that tracks the same index as GDXJ―the MVIS Global Junior Gold Miners Index.
According to Direxion, the suspension of creations will continue until further notice, while redemption orders for the fund will not be affected. JNUG has $1.15 billion in assets under management (AUM).
Not The First ETF Suspension
This isn't the first time an issuer has suspended creations for an exchange-traded product. There are currently 46 U.S.-listed ETPs that are closed to creations for various reasons. Most of them are thinly traded exchange-traded notes with little in the way of assets.
In those cases, the issuer may stop issuing shares because it doesn't see the need to support a product that's not profitable.
But sometimes, large, profitable products can see creations suspended, too. Last year, Credit Suisse made waves when it decided to suspend creations of a highly popular, leveraged oil ETN, the VelocityShares 3x Long Crude Oil with the ticker symbol UWTI. At the time, UWTI had more than $1.5 billion in assets, but Credit Suisse decided to suspend new shares and delist the product, presumably because the firm wanted to exit the exchange-traded note business.
Also in 2016, creations for the iShares Gold Trust (IAU) were briefly halted after strong demand in the fund led to a temporary exhaustion of shares. IAU's exchange-traded commodity structure required it to register additional shares with the SEC before it could resume creations―which it did a few days later.
JNUG's Unwieldy Exposure To GDXJ
One thing JNUG shares with the now-defunct UWTI and the aforementioned IAU is that it is a hit. Assets under management for the fund are currently $1.15 billion, up 10 times from where they were at the start of 2016.
Source: Bloomberg
All three are also commodity-related products. But the similarities end there. According to the issuer, creations for JNUG were suspended "due to the limited availability of certain investments or financial instruments used to provide requisite exposure to the MVIS Global Junior Gold Miners Index."
That's a novel situation. Direxion wasn't available to comment for this story, but a look at the daily holdings for JNUG reveals that the fund holds enormous positions in GDXJ and GDXJ swaps to get its 3x-leveraged exposure to the MVIS Global Junior Gold Miners Index.
As of the close on Monday, JNUG held 9.1 million shares of GDXJ worth $329.3 million and another 81.6 million shares of GDXJ swaps worth almost $3 billion. To put that in perspective, total AUM for GDXJ is $5.2 billion.
In other words, JNUG holds positions in GDXJ shares and swaps equal to 63.5% of GDXJ’s total AUM. This is likely where Direxion is running into problems and what prompted the issuer to suspend creations. JNUG's exposure to GDXJ may have simply gotten too unwieldy and reached the point where it would be difficult to increase it further―especially in light of the concentration issues GDXJ itself has recently faced.
That could be what drove Direxion to suspend creations, effectively capping the shares outstanding for the ETF.
Largest Premium For JNUG On Record
There's no telling when creations for Direxion will resume. Starting on June 17, GDXJ will begin tracking an expanded version of its index, which would seemingly make it easier for that ETF, and by extension, JNUG, to issue more shares.
In the meantime, JNUG will miss one half of the creation/redemption mechanism―a key characteristic that makes an ETF an ETF. Without the ability to create new shares, JNUG could trade at a premium to its net asset value if demand for the ETF exceeds supply.
Indeed, as of the close of trading on Monday, the ETF was trading at a small, but noticeable, 1.4% premium, the largest in the fund's history. JNUG holders and potential buyers should be mindful of the premium and tread carefully if they wish to trade the ETF.
Currently, the Direxion Daily Gold Miners Index Bull 3x Shares (NUGT), a leveraged product from the same issuer that tracks the broader NYSE Arca Gold Miners Index, continues to operate normally and may be an alternative option for traders seeking geared exposure to gold miners.
Contact Sumit Roy at sroy@etf.com
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