Gold ETF Options For Risk Tolerant Investors

by on March 30, 2011 | ETFs Mentioned:

After seemingly losing interest in 2010, investors have resumed pouring money into commodity ETFs in 2011; both broad-based basket funds and resource specific products have grown as these products have come back into style. Precious metals have without a doubt been the hottest corner of the commodity ETF market, as investors have embraced the exchange-traded structure as an efficient means of accessing an asset class that has the potential to act as both an inflation hedge and a safe haven. There are currently 20 ETFs in the Precious Metals ETFdb Category, including options for silver, platinum, palladium, and even broad-based exposure to a basket of metals. But many of the products–accounting for the vast majority of assets–are focused on gold. In addition to the ultra-popular GLD and cost efficient IAU, there are now ETF options for investing in gold vaulted in Switzerland or stored in Singapore. There’s even an ETN that oscillates between exposure to gold and cash depending on momentum factors, presenting a simplified way for trend followers to gain exposure to bullion [see When ETNs Are Better Than ETFs].

It seems as if many investors with exposure to gold through ETFs are in it for the long haul. The Gold SPDR (GLD), for example, has about 400 million shares outstanding and trades an average of 15 million share daily. That means daily volume translates into less than 4% of shares outstanding, a relatively low total in the ETF industry. The S&P 500 SPDR (SPY), for example, sees about a quarter of its total shares change hands on a daily basis.

For investors seeking exposure to gold as part of a long-term buy-and-hold portfolio, there are a number of physically-backed and futures-based products that offer cheap and liquid access to the asset class. But for more active traders focused on making short-term profits, the relatively small movements in gold prices might not present much of an opportunity. For those with the willingness and ability to take on some additional volatility, there are several ETF options that offer leveraged exposure to gold [for more ETF ideas, sign up for our free ETF newsletter]:

Direxion Daily Gold Miners Bull 2x Shares (NUGT)

Many investors have gravitated towards stocks of gold miners as a way to achieve exposure to the yellow metal, preferring to invest in a company that generates cash flows as opposed to a natural resource that will never pay a dividend or coupon. Gold miners also have appeal since these stocks tend to trade as leveraged plays on spot gold prices; because the profitability of mining firms depend on the market price for their goods, they exhibit strong correlation to spot gold prices. And because a significant portion of the cost structure for these companies is fixed, the effect of a jump in gold prices can be amplified [see also Gold Miner ETFs: Breaking Down All The Options].

NUGT combines the effective leverage on gold achieved through investing in gold miners with the more traditional (and predictable) leverage achieved through the use of derivatives. The result is a product that can deliver big gains when gold prices jump and big losses when gold slides (the bear counterpart, cleverly named DUST, is an option for those looking to bet on a gold bubble).

FactorShares 2x Gold Bull/S&P 500 Bear (FSG)

This ETF is part of a suite of “leverage spread” products from FactorShares that seek to boost differences in returns between two asset classes. Similar to NUGT, this ETF combines an investment strategy that often augments changes in the price of gold with the explicit use of derivatives, resulting in a fund that can post big swings in price over a relatively short period of time [see also How ETFs Have Democratized Investing].

Gold and large cap U.S. equities often move in opposite directions, especially when stock markets encounter turbulence and investors flock towards gold as a safe haven. As such, the absolute difference in returns between these two asset classes is often greater than the absolute change in gold–resulting in an amplification of movements in gold prices. Because FSG leverages up this spread by a 2x target, this product can surge when gold prices increase and sink when the metal declines in value.

Like NUGT, this ETF resets exposure on a daily basis. As a result it might be appropriate primarily for investors able to frequently monitor and perhaps rebalance exposure–especially given the potential to deliver big swings in value over a short period of time [see also Gold ETFs: Boom Or Bust?].

ProShares Ultra Gold (UGL)

This ETF offers more traditional leveraged exposure to gold; UGL seeks to deliver daily results that correspond to 200% of the daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. As such, the amplified exposure offered by this product is in a sense more predictable. Though mining stocks often move in lock step with spot gold, there may be sessions when this sector declines even if gold prices climb. The same goes for the “spread” exposure offered by FSG; if gold prices advance but the S&P climbs even higher, that leveraged ETF would lose value [see also Which Gold ETF is Right For You?].

UGL will always move in the same direction as gold prices, though the leverage delivered may be less than the other products profiled above. Like NUGT and FSG, this ETF resets exposure on a daily basis.

Disclosure: No positions at time of writing.