If You Want More Upside From Gold, This ETF Offers a Different Kind of Leverage

Gold (XAUUSD) is rallying again. And while I’m just as likely as the next exchange-traded fund (ETF) nerd to call out the idea of trading an ETF whose returns are enhanced with leverage, I’m taking a different route here — because it might get me to the same place in just a slightly different way. 

The VanEck Junior Gold Miners ETF (GDXJ) gets its mojo from movements in the price of gold. However, it owns gold mining stocks, not the metal itself. Its better-known cousin, the VanEck Gold Miners ETF (GDX), gets most of the love. 

However, in an era when traders keep looking for more aggressive ways to play their strong beliefs, GDXJ is one to know about. Because it not only adds some upside through stocks versus the gold commodity, it also owns smaller miners. As with most other stock industries, smaller stocks tend to be riskier. That means that when they rise, they often rise faster. 

Junior gold miners may act as a high-beta surrogate for physical spot gold. While gold bullion moves primarily on central bank purchasing, real yields, and systemic currency debasement, junior mining equities offer operational leverage to the metal's price without requiring options, swaps, or debt-leveraged funds. 

When spot gold breaches key technical resistance, small-to-mid-cap exploration and production companies tend to generate magnified percentage returns. This is because their operating profit margins expand exponentially once spot prices clear their fixed extraction costs.

The Recent Gold Rally

While I always prefer more gentle upward movements in situations like this, gold’s recent rally was sudden. So GDXJ’s first 20% bounce following a 40% price drop was equally quick. But there still appears to be some room, technically. The 200-day moving average was just taken out (price now above it for the first time since March).

Gold functions as a monetary asset with low volatility relative to individual stocks. Junior miners, however, carry a fixed-cost base — referred to as all-in sustaining costs (AISC) — that covers labor, heavy equipment, fuel, and regulatory compliance.

If a junior miner has an average AISC of $1,500 per ounce, and gold trades at $1,800, the miner captures a $300 profit margin per ounce. If spot gold rises 20% to $2,160 per ounce, the miner’s operating margin increases from $300 to $660, reflecting a 120% expansion in profitability. That’s a different kind of leverage — the operational kind. And it explains why a modest move in physical gold often translates into a far larger rally across junior mining equities.

Key Risks for GDXJ

1. Input cost inflation: Rising energy prices, equipment shortages, and wage growth can push AISC higher, eating into the margin gains generated by higher spot gold prices.
2. Mine-level execution risk: Unlike physical gold, junior miners face geopolitical permitting risks, unexpected reserve write-downs, and operational shutdowns.
3. Equity dilution: Exploration-stage junior miners frequently issue new equity to fund multi-year exploration programs, which can dilute existing share value even during a gold bull market.

The ETF itself is big and liquid, as tends to be the go-to in this sub-segment of gold stocks. GDXJ is nearly 15 years old, and has $8.4 billion in assets. The explosive potential can be seen in those very strong one-year, three-year, and five-year returns, and those also highlight the volatility. 

At under 16x trailing earnings, I consider GDXJ’s stock basket neither cheap nor expensive. And while the 2.25% dividend yield is not too big, it is double that of the S&P 500 ($SPX).

GDXJ spreads its allocation across more than 100 stocks. And with 10 of them making up more than 40% of assets, it is concentrated enough for my liking. The very top of the current position weights is focused around five mining stocks, which make up 28% of assets. 

Gold is a trading vehicle to me. I don’t trust it for the long term, but I love to trade it. And when that trade really starts to pick up steam, it is worth giving GDXJ a look. Sometimes gold is enough on its own. Other times you want leverage. This ETF shows that you can get it without using a 2x ETF to do so. 

Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.