Trouble in the leveraged ETF complex could spark a fresh volatility explosion that hits commodity investors in its wake, according to Macro Risk Advisors.
The New York-based firm warns the VanEck Vectors Gold Miners ETF, ticker GDX, is vulnerable to outsized price swings if its tracked basket of stocks drops by 5 percent or more in a single day.
The culprit: two triple-leveraged ETFs divesting their GDX shares en masse, roiling the $8.5 billion fund in the process.
Sound familiar? It should. A similar feedback loop amid a frenzy of ETF rebalancing took place in February, when products tracking VIX futures were blamed for intensifying the volpocalypse.
Should a similar dynamic engulf GDX, it would shine a fresh light on the complex machinery behind leveraged and inverse products that buy and sell the underlying assets in order to deliver an amplified version of the moves, or the opposite result.
"The selling can beget further price declines which can beget more selling," Dean Curnutt, chief executive of MRA, wrote in an email.
The Van Eck fund has become one of the most heavily traded ETFs in the world thanks to its reputation as a high beta play on gold. It tracks a global index of miners, with its largest allocation to North American companies, primarily in Canada. The fund has tumbled over 8 percent this year, as dollar strength undercuts gold prices.
While gold volatility is low, an uptick in U.S. inflation-adjusted yields as the Federal Reserve raises rates and a stronger greenback could exert more pressure on bullion.
The product's largest one-day drop over the past year was in February at 3.3 percent, according to data compiled by Bloomberg.
