Chart courtesy of YahooFinance (Click to enlarge)
Global X, the New York-based provider of exchange traded funds best known for its emerging market funds, has rebranded its Global X S&P/TSX Venture 30 Canada ETF to play the global small-cap miners niche.
The Global X Junior Miners ETF (JUNR) tracks the Solactive Junior Miners Index and is the first ETF to provide access to small cap mining companies globally. The benchmark is comprised of 96 companies that are involved in the mining of both precious and base metals like gold, silver, copper, nickel, iron, titanium and other base metals/materials.
The index is well diversified with the top holding accounting for only 2.6 percent of total assets. Companies from more than 10 countries contribute to the benchmark including Canada (34 percent), Australia (26 percent), US (18 percent), UK (7 percent) and China (4 percent).
Although commodity prices have been under pressure for much of 2012 due to a sluggish global economy, many have witnessed a change in fortune after central banks around the world initiated accommodative policies, and the trend is expected to continue in the short-term.
According to Global X research, small cap firms tend to benefit in an inflationary environment. Besides, large-cap miners are expected to focus on Mergers & Acquisitions in 2012 as a direct result of $105 billion of cash sitting on balance-sheets.
Add to this pent-up demand for base and precious metals from the world’s rapidly industrializing nations, declining developed nation reserves and rising production costs, and you know why large-caps want to shore up their supply chains by acquiring smaller firms. Also, acquiring new assets are easier than exploring for new reserves and obtaining all the necessary permits.
In addition, investors stand to benefit from M&A activity by large industry players like sovereign wealth funds, large pension funds, specialized PE funds and other non-miners who often hold hard assets for portfolio diversification purposes.
Research by Price Waterhouse Coopers shows despite volatility in commodity prices, deal cancellation as a proportion of total deal volume hit a record low in 2011, indicating acquirers seeing significant value ahead.
If you are bullish on materials you may consider JUNR as it offers a diversified exposure to an often overlooked segment. The fund has an expense ratio of 69 basis points. It is at this point tiny with only $2 million in assets, which is reflected by low daily volume.
As with equities, small caps tend to be extremely volatile and following the major trend is absolutely crucial as the chart above shows. Since its inception, JUNR has been slipping and sliding and has only recently broken its long-term trend line to the upside.
For volatile sector ETFs like this one, I recommend a 10% trailing sell stop.
Disclosure: No holdings