Gold ETFs 101: Dozens Of Ways To Play

Gold has long been a popular investment for those looking to cash in on a laundry list of benefits offered by the precious metal. Some of these advantages include gold’s functionality as a hedging tool against inflation and uncertain markets, a diversifying agent to add stable commodity exposure to round out a portfolio, and also as a speculation vehicle for active traders. But as its price has skyrocketed in recent years, the metal has quickly become less and less accessible to the average investor who is unwilling to spend exorbitant amounts of money to gain gold exposure [see also The Ultimate Guide To Gold Investing].

Enter exchange traded products. ETFs have become popular a means of establishing exposure to gold; the benefits of the exchange traded-structure, such as low costs and intraday liquidity, appeal to all types of investors. These funds have been quickly embraced by numerous institutional traders as well as big name investors like George “The Man Who Broke The Bank Of England” Soros, John Paulson, and Eric Mindich. And as these funds have surged in popularity, so too has the creativity of numerous issuers looking to hop on the gold bandwagon [see Three Legendary Investors With Huge Positions In GLD].

Innovation in the industry over the last several years has given those looking to establish a position in gold more options than ever before. From futures-based funds to leveraged and inverse options, there are more than two dozen ETP options for accessing gold, each with a unique risk/return profile:

Physically-Backed Gold ETFs

Physically-backed investing is by far the most popular approach when it comes to gold ETP allocations. The reason? These products are fairly straightforward, allowing investors to get exposure to spot gold prices at a low cost with few associated risks.

  • Gold SPDR (GLD): This ETF invests in physical gold, meaning that it will reflect changes in spot prices of the commodity.
  • iShares COMEX Gold Trust (IAU): This ETF also invests in physical gold, and is cheaper than GLD in terms of expense ratio.
  • ETFS Physical Swiss Gold Shares (SGOL): This ETF invests in physical gold, storing bullion in Switzerland.
  • ETFS Physical Asian Gold Shares (AGOL): This ETF invests in physical gold, storing bullion in Singapore.

Futures-Based Gold ETFs

The underlying assets of these ETFs consist not of gold bars, but of futures contracts. Returns in these products are attributable to three factors: movements in spot gold prices, slope of the futures curve, and interest earned on uninvested cash. Though futures-based products offer great advantages in that investors do not need a complex futures account to own contracts, these funds are susceptible to certain risks that other ETFs do not carry. One of the biggest and most well-known risks is contango [see also Seven Factors To Consider When Evaluating Gold ETFs].

When markets are contangoed (gold futures markets consistently are) and interest rates are near zero, futures-based funds may lag behind physically-backed ETFs in terms of performance. When rates climb, however, the interest earned on non-invested cash might have the ability to enhance returns on futures-based funds. This process can also occur in the reverse, whereby front month futures are cheaper than current contracts, leading to a gain in the roll process. This is known as backwardation.

Below we outline two futures-based products available for investment:

  • PowerShares DB Gold (DGL): This ETF generates returns based on a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.
  • E-TRACS UBS Bloomberg CMCI Gold ETN (UBG): This product is an exchange-traded note, meaning that investors are exposed to the credit risk of the issuer, but avoid tracking error issues.

Precious Metals ETFs

These products offer exposure to numerous precious metal with varying strategies. Note that some include only gold and silver, while others include metals like platinum and palladium as well. Also, some are of these ETFs are physically-backed, while others are futures based [see also Eight Legendary Gold Investors].

  • ETFS Physical Precious Metal Basket Shares (GLTR): This ETF invests in a physical basket of the following metals: gold, silver, palladium, and platinum.
  • PowerShares DB Precious Metals Fund (DBP): This ETF invests in a basket of precious metals futures contracts on gold and silver.
  • iPath Dow Jones-UBS Precious Metals Total Return Sub-IndexSM ETN (JJP): This product has a similar exposure as DBP, investing in futures contracts on gold and silver.
  • Pure Beta Precious Metals ETN (BLNG): This ETF invests in a basket of precious metals futures contracts including gold and silver.

Gold Miners ETFs

Gold miner ETFs are another popular choice as they allow for investment in companies that produce identifiable cash flows, as opposed to a bar of gold that will never make an interest payment or distribution to shareholders. Because the profitability of gold miners depends on the prevailing market price for the underlying assets, stocks of these firms tend to exhibit a strong correlation to gold prices–and often trade as a leveraged play on spot prices. There are currently several ETPs that offer exposure to gold miners, though there are subtle differences between each that call for a closer inspection of each before deciding which choice is right for your portfolio [see Gold Miner ETFs: Breaking Down All The Options].

  • Market Vectors Gold Miners ETF (GDX): The most popular way to access gold miners, GDX offers exposure to an index that consists of both U.S. and international gold miners. Underlying companies include companies that own many of the world’s largest gold deposits and mining operations, including Barrick Gold and Goldcorp.
  • Market Vectors Junior Gold Miners ETF (GDXJ): This ETF is the small-cap counterpart to the immensely popular GDX, giving investors, which will give investors more room for growth at the cost of higher risks associated with smaller companies.
  • Global X Pure Gold Miners ETF (GGGG): This ETF is another play on gold miners, but the investment methodology of GGGG sets it apart from its competitors. In order to be included int he underlying index, a company must generate at least 95% of total revenues from gold operations. That requirement filters out many of the largest precious metals miners as silver, copper, and other metals may make up more than 5% of the total revenues for many major companies.
  • PowerShares Global Gold and Precious Metals Portfolio (PSAU): PSAU casts a wide net of precious metals miners, with holdings that focus on gold, silver, platinum, and more.

Gold Explorers ETFs

Gold explorers are more speculative than gold miners, as the majority of the companies have very little proven reserves, but instead are highly engaged in the search for new supplies of the shiny commodity. While this asset class may seem very risky, the upside potential is huge; the ETFs offer a way to bet on exploration companies literally striking gold.

  • Gold Explorers ETF (GLDX): For now, this product is the sole option when it comes to gold exploration, holding around 30 companies who maintain operations all around the world.

Leveraged/Inverse Gold ETFs

These products are complex trading tools that are only meant for those who truly understand how they work. For those investors who have the risk tolerance to buy into a leveraged/inverse gold option, they can be met with handsome reward or stunning losses. A single session movement of 10% isn’t all the uncommon for these ETFs, making them and attractive play for those looking to establish short-term positions in gold.

  • Direxion Daily Gold Miners Bear 2x Shares (DUST): This ETF seeks to deliver daily results that correspond to -2x the daily change in the NYSE Arca Gold Miners Index, the same index to which GDX is linked.
  • Direxion Daily Gold Miners Bull 2x Shares (NUGT): This ETF is the bull counterpart to DUST, offering a way to bet on rising gold prices and improving profitability for gold miners.
  • PowerShares DB Gold Short (DGZ): This product is designed to return -100% of an index which invests in gold futures contracts.
  • PowerShares DB Gold Double Short (DZZ): This product is designed to return -200% of the same index that DGZ tracks.
  • ProShares Gold UltraShort (GLL): This ETF seeks to return -200% of the performance of gold bullion.
  • Ultra Gold (UGL): This ETF seeks to return 200% of the performance of gold bullion.
  • DB Gold Double Long ETN (DGP): This fund returns 200% based on the benchmark followed by both DGZ and DZZ.

Note that in December 2011, DUST and NUGT will switch their targeted exposure to -300% and 300%, respectively, of the underlying index.

Best Of The Rest

While many of the above listed funds have fairly straightforward strategies on making gold allocations, there are several products that approach gold investing with unconventional methods, giving investors plenty of options when it come time to make the decision on which of these ETPs to purchase [see also Gold ETF Investing: Closer Look At All The Options].

  • RBS Gold Trendpilot ETN (TBAR): This ETF offers a low maintenance strategy that oscillates between gold and cash based on observable price signals. The oscillation process is determined by the relative performance of the historical moving average of the price of gold bullion. TBAR may add value thanks to the efficiencies of the ETN structure (investors won’t incur trading costs or capital gains)
  • UBS E-TRACS S&P 500 Gold Hedged ETN (SPGH):This product generates its returns by investing an equal amount of assets in both the S&P 500 Total Return Index and gold futures contracts, providing a nice hedging strategy all under one ticker.
  • 2x Gold Bull/S&P 500 Bear (FSG): FSG offers a way to bet on the relative performance of gold, for those who believe bullion will beat the S&P 500. Note that because gold and U.S. equities often move in opposite directions, and because of the explicit leverage in this product, FSG can often exhibit significant volatility.

Disclosure: No positions at time of writing.

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