The Direxion Daily Jr. Gold Miners Bull 2X ETF Isn’t What You Think It Is

With leveraged ETFs, two and two doesn’t always add up

An almost completely ignored asset class in recent years, gold stocks have surged under the novel coronavirus pandemic. With global economies crumbling, there has never been a stronger case for the traditional safe-haven asset. But because of adventurous investors, interest toward leveraged exchange-traded funds like Direxion Daily Jr. Gold Miners Bull 2X ETF (NYSEARCA:JNUG) has spiked. But is JNUG stock an appropriate financial vehicle?

In a word, no. That’s coming from someone who has been bullish on gold and other precious metals for some time. Therefore, I have no vested interest in redirecting anyone away from the metals. In fact, the more the merrier, as rising demand will only make my gold-based holdings more profitable.

But for most people, JNUG stock isn’t what you think it is. Exclusively, this is a trading vehicle — no more, no less. That’s no secret as Direxion states this clearly. If you go to their website, you can see that the long-term returns for JNUG have no resemblance to neither gold nor the junior mining complex.

If you’re still intrigued about this leveraged ETF, let’s take a deeper look as to why you should reconsider.

JNUG Stock Eats Misguided Investors

The first sign that not all is well with JNUG is its comparative long-term returns against its inverse fund, the Direxion Daily Jr. Gold Miners Bear 2X ETF (NYSEARCA:JDST). On a year-to-date basis, JNUG is down nearly 91%, whereas JDST is also down at a loss of 88%.

What gives? Bluntly speaking, leveraged ETFs are terribly deceptive. Initially, rookie investors may assume that “2x” means twice the performance of the benchmark index the fund is tracking. But because leveraged funds have exorbitantly high expense ratios and are constantly being rebalanced, they erode value over time.

Currently, JNUG features an expense ratio of 1.12. That is stratospheric. According to the Wall Street Journal:

“The average ETF carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest. The average traditional index fund costs 0.74%, according to Morningstar Investment Research. On the flip side, there’s been a proliferation of more narrowly-focused and exotic ETFs — many of which are not only unproven, but more expensive. Avoid these funds unless you really know what you’re doing.”

Next, you have to watch for the rebalancing. JNUG’s top holdings include mining companies like Kinross Gold (NYSE:KGC), Pan American Silver (NASDAQ:PAAS) and Sibanye Stillwater (NYSE:SBSW). These names have potential but they’re incredibly risky.

For instance, Sibanye mines platinum and palladium, both metals which are subject to industrial demand. Also, being headquartered in South Africa exposes investors to potential labor strikes and other political risks.

Theoretically, rebalancing helps mitigate these problems. But get it wrong and they can create problems. Thus, the unpredictability of fund performance makes the JNUG ETF an inappropriate vehicle for most investors.

Why You May Want to Consider Leveraged Gold

Despite the many risks, some investors are attracted to leveraged funds. After all, if demand for these tools didn’t exist, no one would offer them.

First, some speculators use vehicles like JNUG because it allows them to bank on their high-conviction beliefs using cash. In other words, JNUG is similar to vanilla investments — you only lose the money you put in.

Particularly, this is beneficial for those who want to short an asset but don’t want the extreme risks of a pure short play. In this case, bears would only risk their principle. Should the target asset move higher, they’re not on the hook for unlimited liability.

Second, JNUG is contextually attractive because it’s trading on a big trend. Mainly, all economic metrics look terrible, particularly the nearly 39 million Americans who filed for unemployment benefits over a nine-week period. Also, with travel demand plummeting, the once-vibrant consumer economy is on life support.

Technically, many bulls believe that this trend will move higher, allowing gamblers to make substantial profits over a short period. Presumably, you would be able to see softness in gold prices ahead of time, allowing traders to only risk money during high-probability events.

Third, the Covid-19 pandemic has created a distinct opportunity for JNUG. Because this is a short-term vehicle, it wasn’t possible for most worker-bees to participate. Your boss would probably frown upon you if you were caught daytrading on the clock.

But with remote work being the new normal, these cubicle warriors suddenly found themselves with the freedom they need to trade these vehicles with the frequency they require. Therefore, interest in JNUG could conceivably rise in the months ahead.

Should You Take the Plunge?

If you’re like 90% of investors, you want to avoid JNUG stock. Frankly, most lack the discipline to make effective use of this fund. Furthermore, the ETF could trade against the underlying fundamentals, which is absolutely frustrating.

Plus, with an expense ratio of 1.12%, you have to be way more right than wrong on your trades. In this case, the cards are stacked deeply against you. Unless you truly know what you’re doing, the headline leverage is really a sucker’s bet.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long the physical precious metals mentioned in this article.