A number of exchange-traded funds (ETFs) are devoted exclusively to gold, a precious metal valued for its industrial uses and its use as a store of value. The shiny metal is used in jewelry and is a key component in a number of electronic products.
Investors have long viewed gold as a hedge against inflation and as a safe haven in times of economic turmoil. Gold ETFs provide investors with a way to take advantage of gold’s unique investment characteristics, whether by tracking the price of the physical commodity or through shares of companies that mine the metal.
Key Takeaways
- The Bloomberg Gold Subindex has outperformed the broader market over the past 12 months.
- Two of the four leveraged gold exchange-traded funds (ETFs), UGL and DGP, offer 2× daily long leverage. The other two, GLL and DZZ, provide 2× daily short leverage.
- These ETFs invest in futures contracts to take leveraged positions in gold.
Gold investors looking to amplify returns might consider a leveraged ETF. Unlike traditional ETFs, whose portfolios are designed to track an index or commodity price on a one-to-one basis, leveraged ETFs use derivatives and debt to magnify the returns on the portfolio by a factor of two or even three. Though the use of leverage can lead to significantly higher gains, it can also lead to significantly higher losses, making leveraged funds much riskier than traditional ETFs.
After rising above $1800 an ounce in late 2022, on January 5, 2023, gold prices reached their highest point since July 2022.
Some leveraged ETFs amplify gains when the underlying index or commodity falls and amplify losses when the underlying index rises. These instruments are called inverse leveraged ETFs, and their added complexity makes them even riskier than traditional leveraged ETFs. Both leveraged and inverse leveraged ETFs are extremely complex financial instruments and are not meant for beginner investors.
Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities that they represent, and losses can amplify during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2× ETF may return 2% on a day when its benchmark rises 1%, but you shouldn’t expect it to return 20% in a year when its benchmark rises 10%.
There are four leveraged gold ETFs that trade in the U.S., two offering 2x daily long leverage and two offering 2x daily short leverage. These ETFs provided leveraged exposure to the commodity gold, not stocks of companies that mine for gold. Some of these funds are relatively small, with low assets under management (AUM) and/or low trading volumes.
For example, the DB Gold Double Long Exchange Traded Notes (DGP) and the DB Gold Double Short Exchange Traded Notes (DZZ) have extremely low trading volumes, making them relatively illiquid and adding to the overall costs of trading them. Investors also should be aware that the websites of these two funds are no longer operational. These funds are considered extremely risky and should be used only by sophisticated investors.
There also used to exist 3× leveraged gold ETFs, such as the VelocityShares 3× Long Gold ETN (UGLD) and the VelocityShares 3× Inverse Gold ETN (DGLD). However, these funds were delisted, with the last trading day of these two funds taking place on July 2, 2020. There are no more gold commodity ETFs trading in the U.S. that offer 3× leverage.
The price of gold was volatile throughout 2021, mostly trading sideways. Gold is down sharply from its most recent peak in March 2022. The total return of the Bloomberg Gold Subindex, which is meant to indicate the price of gold, is -5.0% over the past 12 months. By comparison, the total return of the S&P 500 is -8.1%, as of Sept. 12, 2022.
However, investors should note that leveraged gold ETFs are not meant to track gold over long time periods. The leverage resets on a daily basis for these funds, which are not intended for long-term, buy-and-hold strategies. The price growth figure cited above is to be used only as a reference illustrating how gold has performed over the past year.
All data below is as of Sept. 12, 2022. In order to focus on the fund's investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
The first two ETFs listed below provide 2× daily long leverage to gold, while the second two provide 2× daily short leverage. Each pair is ranked by daily trading volume, a measure of liquidity.
Inverse ETFs can be riskier investments than non-inverse ETFs because they are only designed to achieve the inverse of their benchmark’s one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn’t expect it to return 10% in a year when its benchmark falls -10%.
2× Long Leverage: ProShares Ultra Gold (UGL)
- Three-Month Average Daily Volume: 109,686
- Performance Over One-Year: -12.2%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- Assets Under Management: $184.6 million
- Inception Date: Dec. 1, 2008
- Issuer: ProShares
UGL is structured as a commodity pool, combining investor contributions to trade futures-based leveraged long positions in gold. The fund offers bullish investors daily investment returns (before fees and expenses), corresponding to 2× the daily performance of the Bloomberg Gold Subindex. Investors should be advised that this ETF resets on a daily basis, so any investments in it should be monitored daily. Significant losses are possible, especially in volatile markets.
2× Long Leverage: DB Gold Double Long Exchange Traded Notes (DGP)
- Three-Month Average Daily Volume: 7,019
- Performance Over One-Year: -10.5%
- Expense Ratio: 0.75%
- Annual Dividend Yield: N/A
- Assets Under Management: $75.9 million
- Inception Date: Feb. 27, 2008
- Issuer: Deutsche Bank
DGP is structured as an exchange-traded note (ETN), a type ofunsecured debtinstrument that tracks an underlying index of securities and trades like a stock. ETNs share characteristics similar to those of bonds, but they do not make periodic interest payments. The fund provides 2× daily long leverage to the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold. It offers a powerful trading tool for investors looking to take a short-term bullish position in gold futures. DGP’s leverage resets on a daily basis, meaning that returns are compounded when held for multiple periods. It is intended for sophisticated investors and not meant for use in a long-term portfolio.
ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs, which can negate some of your investment gains or increase your losses.
2× Short Leverage: ProShares UltraShort Gold (GLL)
- Three-Month Average Daily Volume: 78,103
- Performance Over One-Year: 2.8%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- Assets Under Management: $31.7 million
- Inception Date: Dec. 1, 2008
- Issuer: ProShares
GLL is an inverse leveraged fund that uses futures contracts to take a leveraged short position in gold. It’s structured as a commodity pool. The fund offers daily investment returns (before fees and expenses), corresponding to -2x the daily performance of the Bloomberg Gold Subindex. GLL’s leverage resets on a daily basis, resulting in compounded returns when held for multiple periods. This ETF is a powerful tool that can amplify returns and should be used only by sophisticated investors. Investors lacking risk tolerance should avoid this fund.
2× Short Leverage: DB Gold Double Short Exchange Traded Notes (DZZ)
- Three-Month Average Daily Volume: 14,372
- Performance Over One-Year: 7.4%
- Expense Ratio: 0.75%
- Annual Dividend Yield: N/A
- Assets Under Management: $6.0 million
- Inception Date: Feb. 27, 2008
- Issuer: Deutsche Bank
DZZ is structured as an ETN and provides 2× daily short leverage to the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold. This fund is useful for investors looking to take a bearish short-term bet on gold. It is not meant to be held in a long-term, buy-and-hold portfolio. Also, investors should take note of the fund's extremely low trading volume and AUM, indications that the fund is not heavily traded and thus may be harder to buy and sell. This makes DZZ relatively more risky than GLL, which is already considered a small fund with low trading volume and AUM.
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As a seasoned financial expert with a comprehensive understanding of the intricacies of investment instruments, particularly in the realm of precious metals, I can provide valuable insights into the concepts presented in the article about gold exchange-traded funds (ETFs).
The article highlights the significance of gold, not just as a precious metal with industrial applications and jewelry value but also as a store of value and a hedge against inflation. Gold ETFs offer investors a unique opportunity to tap into the characteristics of gold as an investment, either by tracking the physical commodity's price or through shares of companies involved in gold mining.
One key aspect discussed is the use of leverage in certain gold ETFs. Leveraged ETFs, such as ProShares Ultra Gold (UGL) and DB Gold Double Long Exchange Traded Notes (DGP), aim to magnify returns by a factor of two through the use of derivatives and debt. However, the article emphasizes the higher risks associated with leveraged ETFs, as they can lead to significantly higher gains but also expose investors to higher losses.
The distinction between leveraged ETFs and traditional ones is crucial. While traditional ETFs typically track an index or commodity price on a one-to-one basis, leveraged ETFs reset on a daily basis. This resetting introduces a daily compounding factor, making them unsuitable for long-term, buy-and-hold strategies.
The article provides insights into specific leveraged gold ETFs, categorizing them into 2× daily long leverage and 2× daily short leverage. It mentions ProShares Ultra Gold (UGL) and DB Gold Double Long Exchange Traded Notes (DGP) as examples of the former, while ProShares UltraShort Gold (GLL) and DB Gold Double Short Exchange Traded Notes (DZZ) represent the latter.
Furthermore, the risks associated with low trading volumes and assets under management (AUM) are highlighted, particularly with examples like DGP and DZZ having relatively low liquidity. The article warns that such illiquidity can lead to higher trading costs, impacting investment gains or increasing losses.
The piece also touches upon the historical performance of gold prices, its volatility throughout 2021, and the total return of the Bloomberg Gold Subindex compared to the S&P 500.
In conclusion, the article provides a comprehensive overview of leveraged gold ETFs, their risks, and nuances, making it a valuable resource for investors seeking to understand the dynamics of investing in gold within the ETF framework.
