JNUG - JNUG: Only For The Most Active Investors

2023-11-29 00:09:32 ET

Summary

• Leveraged ETFs are not suitable for long-term investments due to their long-term decay from daily rebalancing.
• JNUG is designed to double the daily performance of the VanEck Junior Miners ETF.
• I believe Gold is set to bust through its triple top at $2,070, and the miners will outperform during that rally.

Before we get too far into this article, leveraged ETFs are terrible long-term investments. We'll get into some of the reasons for this later in the article. I've written about leveraged ETFs for Seeking Alpha in the past through my coverage of the Direxion Daily S&P 500 3X Bear ETF ( SPXS ) earlier this year and the Volatility Shares 2x Bitcoin Strategy ETF ( BITX ) more recently. Since these leveraged ETFs are designed to be used as shorter term trading vehicles rather than longer term investments, readers should remain mindful of the publication date of any levered ETF article before jumping into a position and this instance is no different.

What Is JNUG?

The Direxion Daily Junior Gold Miners Index Bull 2X Shares ETF ( JNUG ) is a leveraged play on the VanEck Junior Gold Miners ETF ( GDXJ ). Given the "2x" strategy, JNUG holders can reasonably anticipate a return that is double the return of GDXJ shares on a daily basis.

GDXJ's holdings are generally geared more toward the smaller cap gold and silver miners compared to the much larger VanEck Gold Miners ETF ( GDX ). You won't find Barrick Gold ( GOLD ), Agnico Eagle ( AEM ), or Newmont Corp ( NEM ) among GDXJ's nearly 100 equity holdings. Given that gold miners are risky plays on gold, a 2X leveraged fund that tracks the smaller cap gold miners is arguably one of the riskier ETFs in the public equity markets.

Seeking Alpha's risk grades for JNUG come in at an "F" nearly across the board. The fund has an expense ratio of 1.15% and $289.5 million in AUM as of the article submission.

Fund Performance

In a sampling of recent sessions, JNUG generally gets pretty close to double the returns of GDXJ. However, there are instances when it underperforms by as much as much as 50 to 60 bps in a session:

Source: TradingView, daily closes

Combining the returns from the 10 sessions in our sample, JNUG's underperformance averages about 5 basis points. All things considered, JNUG's performance will generally return close to 2x the return of GDXJ over very short periods of time. Longer term, the fund will underperform:

Consider the year-to-date performance for GDXJ against that of JNUG. The VanEck fund is up by over 6% while the leveraged fund is down by over 5%. This gets us to why the fund shouldn't be considered as a long-term investment holding.

Major Risk

Like other leveraged funds from Direxion, JNUG is rebalanced every day. Because of this, JNUG will do very well when GDXJ is in the midst of a strong multi-day rally. In Direxion's 3x example table below, during five consecutive hypothetical sessions where markets are rallying, the leveraged fund will actually outperform the expected return of index:

Interestingly, if the index is going down in consecutive sessions, the leveraged bull fund won't decline as much because the rebalancing reduces exposure. However, the worst thing for a leveraged fund is a sideways market. In the table below, we see what happens when the index is flat after 6 trading sessions:

In this example, the market that the fund tracks is flat but the fund is actually down 4.5%. Since volatility is reality, over time the fund will decay as exposure levels will be adjusted to meet the criteria of the fund's objective. This is what ten years of daily rebalancing in a volatile market looks like:

GDXJ is up 21% over the last 10 years while JNUG has essentially gone to zero due to rebalance decay. The US Securities and Exchange Commission recently issued a bulletin explaining much of what I've articulated in this risks section. The SEC's concern seems to be that inexperienced investors may not fully understand the decay of leveraged ETFs:

Some investors might invest in these ETFs with the expectation that the ETFs may meet their stated daily performance objectives over the long term as well. Investors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives and may potentially expose investors to significant and sudden losses.

If there was any doubt up until this point, JNUG is not suitable for long-term investment and should only be used for short-term trading. Given that, what can we observe in the GDXJ setup today?

Trade Setup

In my view, to justify longing JNUG, there has to be a quality technical setup for GDXJ and an expectation that miners will outperform the metals themselves; I believe we have both. When we look at the relationship between gold and miners over a long period of time, we can see miner outperformance when times are good for gold investors and underperformance when the metal moves sideways:

In 2020 when Gold ripped from $1,450 up to $2,070, the miners overshot those gains. However, it's been a painful bleed in the miners since as Gold has failed to breakout to new highs. The junior miners are still currently more than 40% under their 2020 highs even as Gold is breathing down a new all-time high:

We currently find Gold quickly approaching yet another test of the $2,065-2,075 area. This is where individual speculation becomes important. I've laid out how I see the fundamental setup for gold multiple times through Seeking Alpha:

• Follow The Yellow BRICS Road
• Yields Are Spiking, Buy Sprott Physical Gold Trust Anyway

In my view, the "triple top" in that zone is going to finally give way and the metal will rally to new all-time highs. With that will come a change in sentiment that will see gold-proxy plays like miners become interesting to both investors and traders once again. I believe we're already seeing that sentiment begin to change judging by the miners outperforming over the last several weeks:

Having now broken out over both the 200-day moving average and the trendline resistance that dates back to April, I think the setup for GDXJ is very bullish. On top of that, we can observe an inverse head and shoulders pattern. RSI is admittedly getting overbought. But I suspect dips from here are buying opportunities. I'm building a GDXJ position. And I'm also utilizing the JNUG shares to maximize swing trade capital.

Closing Thoughts

As a highly risky play, it is imperative that JNUG buyers actively manage their positions and take a responsible approach to allocation. For tactical traders who want to generate greater returns from a broad increase in junior gold miners, going long JNUG offers a higher risk/higher reward opportunity. The alternative to longing shares of a fund that will decay over time would be playing the options market.

Since I have a personal aversion to margin trading or options, my preference is to try to time the leveraged ETFs when I view the technicals as favorable. I like this approach better because I can't get blown up like I can with margin if I'm wrong. Furthermore, I can simply take my remaining capital out of the trade if I choose to throw in the towel on the idea. In my view, longing JNUG in responsible size with a short-term view is a solid speculative bet with GDXJ now breaking out.

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