You Can Make Double-Digit Gains by June 16 on This “Risk-Free” Trade

Today, we’ve found a low-risk, high-reward trading opportunity that you need to enter now…

The last time this scenario played out, you could have walked away with 17% gains in a little over two months.

It’s a two-step trade that removes “market risk” (the risk of owning stocks) from the equation.

In other words, it doesn’t matter what the market does over the next two months.

As long as we set up this trade correctly, we have a good chance to make double-digit gains by June 16. And if it falls through, your losses will be minimal.

As you know, our goal at The Palm Beach Daily is to provide you with ideas that will help you get richer every day.

And this is a cheap opportunity for us to roll the dice… and make some money.

The Closest Thing to a Risk-Free Trade

This profitable scenario is taking place in the exchange-traded fund (ETF) sector.

An ETF is a security that tracks an index, a commodity, bonds, or a basket of assets. They trade on exchanges just like stocks.

For numerous reasons, ETFs routinely sell their old positions and add new ones. We call it rebalancing.

If you know when an ETF is about to rebalance—and can identify which stocks it’s buying and selling—you can set up a unique type of trade.

And these trades can be really profitable. Here’s why…

According to one study, when the S&P 500 adds a stock, it gains about 8.4%. When the S&P 500 removes a stock, it falls about 14%.

Stocks added to the Russell 2000 Index gained 20% leading up to their inclusion. Those removed from the index lost 9% over the same span.

By now, you may see how this trade is setting up…

To profit from this type of trade, all you have to do is buy the stocks that are being added to an index while shorting the stocks that are being removed.

The beauty of this strategy is that it doesn’t matter what the market does. You just need the stocks that have been added to the index to outperform the stocks that have been removed from it.

There’s a high likelihood of this happening. So the trade is virtually risk-free.

Today, we’re going to apply this strategy to the VanEck Vectors Junior Gold Miners ETF (GDXJ).

But first, let us show you how a similar scenario involving GDXJ worked back in 2014.

Betting on the Past

GDXJ is a popular fund that tracks small gold miners.

Back in 2014, the fund grew in size and owned a larger percentage of several miners than federal regulations allow.

When that happens, the fund can either cut contributions or change the underlying index it tracks.

GDXJ chose the latter option.

It decided to add bigger miners so it could continue to grow. To make room for the new positions, the fund had to get rid of some of its old ones.

When GDXJ announced it was rebalancing, its largest holdings plummeted. From October 1–December 31, 2014, the fund’s top 10 holdings dropped an average of 19.4%.

Meanwhile, its top five biggest additions only lost an average of 1.7% during the same span.

The additions outperformed the sellers by 17.7%.

If you bought the companies added by GDXJ and shorted the companies it sold, you’d have walked away with a 17.7% gain in just two months.

And it didn’t matter what happened in the gold market (in fact, gold prices dropped during that period). You just need the additions to outperform the subtractions.

Today, we’re seeing a similar setup with GDXJ.

History Repeats Itself

In the first four months of 2017, GDXJ assets climbed 55% to $5.3 billion. And just like in 2014, it owns a larger percentage of some miners than regulations allow.

Starting June 16, GDXJ will rebalance its portfolio again by adding larger miners. That means it will have to remove some of its current holdings.

According to Scotiabank, GDXJ will be forced to sell up to $2.6 billion of its current positions when it rebalances.

Over the next two months, we’ll see the prices of its current holdings drop, especially those in the top 10. Right now, the top 10 consists of these companies:

We also identified the companies GDXJ will most likely add to its portfolio. They are:

(If you live in the United States and want to buy the Canadian or Australian shares, you need to check with your broker to see if they’re available.)

Now, these five stocks have already moved up a little in the past week. But we expect them to charge higher as June 16 approaches.

So here’s how the trade works…

Short the stocks GDXJ sells. And go long the stocks GDXJ is most likely to add.

You’ll exit this trade a week after GDXJ completes the rebalancing on June 16.

If the scenario plays out like 2014, we’ll pocket double-digit gains in just over two months. And we’ll do it while minimizing risk.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. Now, a 3-Minute Market Minder from our colleague, Palm Beach Letter editor Teeka Tiwari.

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From Derrick W.: Hey Teeka, what’s up? You seem to have totally detached from your Palm Beach Confidential readers. You seem far more interested in globe-hopping than clearly communicating with us like you used to.

You need to spend a little less time globe-hopping and a little more time taking care of business at home. Because of the rapid changes in the crypto world, you need far more hands-on involvement than you seem willing to give. Please fix that.

Editor’s Reply: Thanks for the note, Derrick. We can assure you that no one in the newsletter business stays on top of the cryptocurrency space more than Teeka. And he’s traveled far and wide to bring you the most profitable ideas out there. In fact, we’re up an average of 126% on our six crypto plays in the PBC portfolio because of his diligent research.

Did you know Teeka and his team have created a new “Crypto Corner” on the Palm Beach Confidential webpage? It contains instructional videos, frequently asked questions (FAQs), and everything else you need to know about cryptocurrencies.

And Teeka continues to connect directly with his Confidential subscribers via his biweekly updates. His last update was on April 14. You can expect the next one in your inbox on April 26. And you can find all of his updates right here.

We also have a YouTube channel dedicated to Teeka’s can’t-miss 3-Minute Market Minders, which is a regular feature in The Palm Beach Daily. If you subscribe to the channel, you’ll never miss his latest insights. And, of course, you can watch his most recent 3-Minute Market Minder above in today’s issue.

Bottom line: We can’t think of anyone in the industry who’s more engaged with their subscribers than Teeka.

From Scott D.: I read your note about Deadly Drones in Connecticut [see our April 18 Market Briefs]. I say no f’ing way we should allow state and local police to acquire and deploy drones with deadly weapons. They have plenty enough ways to kill us now. It’s bad enough the military uses them indiscriminately all over the world. But to allow deadly drones in America is going too far.

From Jacquie U.: I’m interested in seeing more about Elite 25 companies like National Health Trends [“The Final Step to Picking Elite Companies”].

Editor’s Reply: We update the Elite 25 every month. You can read the most recent list right here.