ETF powerhouse Direxion announced late last week that they won’t be creating any new shares of their JNUG ETF. JNUG is a leveraged ETF that tracks changes in the junior gold mining sector, mostly through credit swaps of GDXJ. GDXJ is another ETF but is not leveraged.
Fortunately we don’t have to go deep into how the leveraging magic happens. You just have to know what the impacts might be on investors and traders, and act accordingly.
First, this doesn’t mean JNUG is going away. Far from it. Right now there are approximately $1.1 billion Australian (with a B!) worth of JNUG shares out there. This is a highly profitable product for Direxion. ETF issuers make money on management fees for the trades behind the scenes that make ETFs work, and they are not likely to just up and walk away from that sort of volume. Even if the fees were just 1% per year, would you walk away from $11 million AUM profit per year? We thought not.
Second, your friendly neighborhood Gold Enthusiast does not recommend “investing” in JNUG. Investing means long-term buy and hold, and long-term means more than 6 months. Long-term buy-and-hold of highly leveraged ETFs is a tricky prospect due to time and cost degradations. These products are really best used when there is a trend you want to ride, or for short-term holdings if you are more conservative. So you probably shouldn’t be buying-and-holding JNUG.
Third, not issuing new shares means the maximum number of shares are out there right now. This is just like a regular stock. So if there is suddenly more demand for these shares than there is supply, the price will rise faster than the economic relationship to the underlying assets. In other words, we’re likely to see more volatility in JNUG than normal next time there is a shock to the gold sector. This could be very good for your pocketbook if you’re on the right side of the trade.
Yesterday the difference between the underlying assets and the price of JNUG was about 1.4%. (And it can change second-by-second, so may not apply this morning.) Not much perhaps, but does illustrate the principle. If JNUG is running a premium in a time when the sector is dropping, what will it do when the sector is rising?
Your Gold Enthusiast hasn’t traded JNUG a lot, but gee whiz, with this news we’ll be adding it to our regular look-at-it-every-morning watch list.
Signed, The Gold Enthusiast
DISCLAIMER: At the time of writing, the author had no positions in any mentioned security (JNUG or GDXJ). The author may initiate a long position in JNUG over the next 48 hours.