Can an exchange-traded fund get too big for its index? That’s the question investors in one popular gold miner ETF are grappling with after rapid asset growth pushed it to significantly deviate from its underlying index.

Written by Sumit Roy (ETF.com)

The ETF in question is the VanEck Junior Gold Miners ETF (NYSE: GDXJ), which tracks the MVIS Global Junior Gold Miners Index. Since early 2016, assets in the fund ballooned from a little more than $1 billion to $5.4 billion currently. Some of that was due to rising share prices?GDXJ nearly doubled from $19.80 at the start of 2016 to $36.71 today, an 85% gain thanks to the rebound in gold but a lot of it had to do with the enormous amount of new money that came into the fund. Since Jan. 1, 2016, inflows into the ETF have totaled $3.3 billion. For almost any ETF, that’s a big amount, but especially for one that targets a relatively niche area like junior gold miners.

GDXJ Assets Under Management

Source: Bloomberg

Giant Stakes In Underlying Holdings

The ETF has gotten so big that it now owns giant stakes in its underlying holdings, three-quarters of which are Canadian companies. According to an analysis by Scotiabank, there are 10 Canadian companies that the ETF owns where its ownership percentage is more than 18%.

For six of those companies, the percentage would be even greater, but presumably, the fund doesn’t want to exceed the 20% level, which, under Canadian rules, would force the ETF “to automatically extend a takeover offer to all remaining shareholders at the same terms,” according to a Scotiabank report.

The ETF has also struggled to abide by U.S. IRS diversification requirements. “GDXJ has intermittently been in jeopardy of losing its preferential tax treatment (as a regulated investment company) since last September because its portfolio often doesn’t comply with the diversification requirements of the U.S. Internal Revenue Code,” noted Scotiabank.