A Small-Cap ETF – A Big Idea for Gold Bugs (GDXJ)

The fallout from plunging oil prices and Europe’s sovereign debt crisis has given investors few places to hide. Two asset classes are on the upswing lately: the U.S. Dollar and Gold. Both are seen as safe havens. Yes, they’re bouncing around a lot and are due for a correction. The current pullback could be a good buying opportunity. Today we’ll focus on gold-related investments.

Thanks to ETFs, you can participate in gold’s rally without actually owning gold. You’ve probably heard of the SPDR Gold Shares (GLD). GLD is backed by physical gold holdings and has become the world’s second-largest ETF by assets, thanks to rising gold prices and huge cash inflows. Several smaller ETFs are also backed by physical gold. There are other ETFs to help investors play positive gold trends that are not reliant on actual gold holdings.

The Market Vectors Junior Gold Miners ETF (GDXJ) is the small-cap cousin to the Market Vectors Gold Miners ETF (GDX). The latter focuses on large-cap names. GDXJ is a small-cap ETF that has proven popular with investors since its debut in November 2009, accumulating almost $116 million in assets. That’s an impressive haul in such short time.

Some investors still view small-cap gold names in a negative light. This is probably due to those promotional pieces we get by email from unscrupulous hucksters extolling a small-cap miner with no chance of survival, let alone turning a profit. Those are NOT the stocks GDXJ owns. While not huge, New Gold (NGD), Gammon Gold (GRS), Coeur d’Alene Mines (CDE), and other holdings are real companies that are in the business to stay.

About 54% of GDXJ’s holdings are considered “small-cap” using the metric of a market cap of $200 million to $1 billion. The ETF balances this with 44% in mid-cap names (stocks with market caps of $1 billion to $5 billion). In addition, GDXJ’s country exposure should give investors some comfort. Nearly two-thirds of the assets are in Canadian companies. Australia and the U.S. also have double-digit allocations.

To be sure, many of GDXJ’s holdings could be considered speculative. That’s what makes this ETF a good idea. Select small-cap gold miners can offer big-time rewards. The trick is to own the right names. GDXJ isn’t actively managed, but its index methodology seems to result in a pretty good selection.

GDXJ has performed admirably so far in 2010, gaining about 10%, in line with GDX and GLD. GDXJ has outperformed its larger rivals since its debut last November. Of course, any gold-related ETF is sensitive to the daily price swings in the underlying commodity. Bear that in mind if you buy. Nevertheless, GDXJ may be a good alternative for some gold exposure. To go long small-cap and mid-gap gold producers, buy GDXJ.

Disclosure covering writer, editor, publisher, and affiliates: Long GLD. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.