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Van Eck launches junior gold miners ETF

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New York-based asset manager Van Eck Global has launched Market Vectors Junior Gold Miners ETF on the NYSE Arca.

GDXJ is the first exchange-traded fund in the country to provide investors with concentrated access to “juniors” – small and mid-cap mining companies, many of which are actively engaged in developing new sources of gold through greenfields exploration or use of new geologic models.

“Junior miners represent an early stage opportunity similar to a venture capital investment, the potential exists for high growth, but significant risks exist as well,” says Jan van Eck, principal at Van Eck Global. “At a time when global gold production has been dropping while demand has been on the rise, nimble young companies with attractive projects are potentially both a key source of new gold production and attractive takeover targets for more established players in the field.”

As they are typically early-stage companies, there are several risks associated with investing in junior miners. Many juniors operated at a loss in 2008 and approximately a third of the companies in the fund’s underlying index had negative cash flow on a trailing 12-month basis as of 30 June 2009.

Juniors are particularly vulnerable to the price trend of gold as a drop in gold prices could affect their profitability as well as their ability to secure financing to develop new and existing properties, among other things.

GDXJ seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index, a rules-based, modified market cap-weighted, float-adjusted index comprised of a global universe of publicly traded small- and mid-capitalization companies that generate at least 50 per cent of their revenues from gold or silver mining.

The fund carries a gross expense ratio of 0.68 per cent and a net expense ratio of 0.60 per cent.

As of 30 September 2009, the weighted average market capitalization of the index’s constituents was USD850m. The six countries by weighting were Canada (62.6 per cent), US (21.8 per cent), Australia (11.2 per cent), South Africa (2.4 per cent), China (1.3 per cent) and UK (0.7 per cent).

Joe Foster, the fund’s manager, says: “We believe the two key themes driving the gold market right now are gold as an alternative to paper currency and gold as a hedge against potential inflation. While there have been no onerous levels of inflation so far in this gold cycle, firming commodities prices and the liquidity being created by current monetary policies could eventually bring much higher levels of inflation.”

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