Just browsing through the GDX and GDXJ prospectus, and it does appear that up to 33% of the holdings in these two ETFS have been lent out to third party banks, under a securities lending agreement (AMSLA). In return the banks provide, US Govt bonds as collateral.

So when you buy one of these ETFs, you are actually owning up to one third in US govt bonds, with a “promise” from the banks to return the stocks, at some point in time.

IMHO, this is an accident waiting to happen. For example, when (not if) there is a systemic breakdown in the derivatives and/or government bond markets, the risk is the counter party bank is not able to return the borrowed PM stocks. So the ETF end up holding the collateral of government bonds, and what are they worth?

Here are the words from the prospectus:

“VanEck Vectors Exchange Traded Funds (ETFs) may lend securities to generate additional income which may help reduce expenses. All net proceeds earned by VanEck Vectors ETFs in the securities lending process are allocated to the applicable ETF after subtracting fees payable to the lending agent.

Securities lending is an established practice that involves the lending of securities from a lender (“Fund”) to a third-party (“Borrower”). In return, the Borrower posts collateral — typically cash or U.S. Government securities — in an amount equal to at least 102% of the value of the borrowed securities. Over the course of the loan term, the Fund will receive any interest or dividends on the securities loaned. Moreover, the Borrower will pay a fee, as well as any interest earned on the investment of the cash collateral.

The primary risk in securities lending is that a Borrower may default on its commitment to return securities that are on loan. If this occurs and the value of the liquidated collateral does not exceed the cost of repurchasing the securities, the Fund may suffer a loss with respect to the shortfall. This risk and others are described in more detail in the statutory prospectus, under “Lending Portfolio Securities”.

Note: Currently one third of holdings in both ETFs appear to be lent out to a range of banks, who then “lend” the same securities to others, for short selling purposes. The list of banks is extensive and includes Citigroup, Daiwa, HSBC, Nomura and BNP Paribas.

The Fund may lend up to 33% of its investments requiring that the loan be continuously collateralized by cash, U.S. Government or U.S. Government agency securities, shares of an investment trust or mutual fund, or any combination of cash and such securities at all times equal to at least 102% (105% for foreign securities) of the market value plus accrued interest on the securities loaned.

Now overlay on top of this lending program, the derivatives instruments of DUST, NUGT, JDST and JNUG, then the question becomes who are the counter parties and how high are the risks of a default.

Most folks have no idea how dangerous these things are, and actually what they are owning. It is not what they think it is.

Bottom line: Own individual PM stocks in your name. Avoid the ETFs and especially the leveraged derivatives of those ETFs.

http://www.vaneck.com/equity-etfs/securities-lending-borrowers-pdf/