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Published: May 18, 2023 11 min read

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Close-up of a fine gold bar

Gold Exchange-Traded Funds (ETFs) are a popular investment instrument for those seeking exposure to the price of gold. On the other hand, leveraged gold ETFs can provide enhanced returns to investors by using borrowed funds to increase their exposure to the yellow metal.

Below, we will provide an overview of leveraged gold ETFs, how they work, and the different types available to investors.

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What is a leveraged gold ETF?

A leveraged gold ETF is a type of precious metals ETF that uses financial derivatives and borrowed funds to increase exposure to gold. Unlike traditional gold ETFs that seek to track the price of gold, leveraged gold ETFs aim to deliver amplified returns, both in up and down markets, relative to the underlying gold price.

Inverse leveraged gold ETF

An inverse leveraged gold ETF is designed to profit from a decline in the price of gold. These ETFs use derivatives and short-selling techniques to achieve returns that are inverse to the daily movements of gold prices. The value of an inverse leveraged gold ETF goes up when the price of gold goes down and vice versa. These types of ETFs are primarily used by investors who want to speculate on falling gold prices or hedge against losses in their gold holdings.

Single-stock leveraged gold ETF

A single-stock leveraged gold ETF invests in a single company that is involved in gold mining or exploration. This type of ETF is different from traditional gold ETFs, which invest in a basket of gold mining companies. A single-stock leveraged gold ETF uses leverage to magnify the returns of the underlying company’s stock. If the stock performs well, the ETF will outperform the market, but if the stock performs poorly, the ETF will underperform.

Double and triple-leveraged gold ETFs

Double and triple-leveraged gold ETFs use derivatives and other financial instruments to amplify the daily returns of gold prices. These ETFs aim to provide two or three times the daily return of the underlying gold index or benchmark. For instance, if the price of gold goes up by 1%, a double-leveraged gold ETF may go up by 2%, while a triple-leveraged gold ETF may go up by 3%.

The Pros and Cons of leveraged gold ETFs

Pros of leveraged gold ETFs

One of the main advantages of leveraged gold ETFs is that they offer a way to gain exposure to gold price movements without owning the physical metal or futures contracts. This can be particularly appealing for investors who may not have the capital or desire to trade in the physical gold market.

Additionally, leveraged ETFs offer a way to magnify returns, as leverage can increase potential gains for investors. This can be beneficial in a bull market for gold, where investors can potentially earn a higher return on their investment.

Another advantage is that they can provide greater liquidity compared to physical gold or gold futures contracts. This is because leveraged ETFs are traded on stock exchanges, where investors can easily buy and sell shares at any time during trading hours. Furthermore, the ability to trade in and out of leveraged gold ETFs means that investors can react quickly to changes in the market or adjust their investment strategy as needed.

Cons of leveraged gold ETFs

One of the main drawbacks of leveraged gold ETFs is the increased risk that comes with using leverage. Because leveraged ETFs are designed to provide two or three times the daily return of their underlying assets, they can experience significant losses in a market downturn. The use of leverage can cause the ETF to lose value even if the underlying asset’s price remains unchanged.

The use of leverage requires additional management and trading costs, which are passed on to investors in the form of higher fees. Moreover, leveraged ETFs can experience tracking errors, resulting in the ETF deviating from its intended performance. This can happen due to market volatility, trading costs, and the compounding effect of leverage. As such, investors should consider the risks and expenses associated with leveraged gold ETFs before investing.

How do leveraged gold ETFs work?

Leveraged gold ETFs are designed to amplify the performance of gold by using leverage, which means borrowing money to invest in the asset. Typically, a leveraged gold ETF will hold a combination of physical gold (gold bullions, coins, etc.) and derivatives such as futures, options, or swaps.

The ETF issuer will then use this combination to create a leveraged exposure to gold. The leverage can vary depending on the ETF, with some offering 2x, 3x, or even 4x the exposure of the underlying gold price.

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Top leveraged gold ETFs to consider

ETF Name Current Price Annual Dividend Yield Expense Ratio
ProShares Ultra Gold (UGL) (Inception date: December 2008) $65.06 N/A 0.95%
ProShares UltraShort Gold (GLL) (Inception date: December 2008 $25.89 N/A 0.95%
DB Gold Double Long ETN (DGP) (Inception date: February 2008) $44.06 N/A 0.75%

Factors that impact the price of leveraged gold ETFs

One of the key drivers of leveraged gold ETFs is the performance of the underlying gold market. The price of gold is subject to fluctuations in supply and demand (gold miners), and investors in leveraged gold ETFs and other commodity ETFs will need to monitor the price of gold closely to understand the potential impact on their investment.

Geopolitical issues, the value of the U.S. dollar, and economic events can also significantly impact the price of leveraged gold ETFs. For example, during times of war or global economic uncertainty, investors may seek out safe-haven assets such as gold and other precious metals, which could drive up the price of gold and, in turn, the price of leveraged gold ETFs.

The level of demand for the specific leveraged gold ETF can also impact its price. High demand for a particular leveraged gold ETF may increase its price and vice versa.

Another factor to watch is the GLD. Traded on the NYSE Arca, the ticker symbol GLD is an ETF that represents SPDR Gold Shares. It was created to monitor the price of gold through shares representing ownership of 800+ tons of gold bullion. It is vital for investors to keep all these factors in mind and to monitor them closely when trading leveraged gold ETFs.

How to invest in leveraged Gold ETFs?

  • Researching different leveraged gold ETFs: It’s crucial to learn about the different types of leveraged gold ETFs by reviewing the prospectuses and fact sheets. These documents contain information on the ETF's holdings, investment strategy, expenses and past performance. You may also want to read analyst reports or seek professional investment advice to gain a deeper understanding of the ETF's risks and potential rewards.
  • Develop your investment strategy: Consider your investment goals, risk tolerance and time horizon when deciding how much money to allocate to each ETF. Some investors may choose diversification for their investments by investing in a mix of leveraged gold ETFs, while others may focus on a specific type of ETF.
  • Open a brokerage account: You will need a brokerage account to buy and sell leveraged gold ETFs. Many online brokers offer commission-free trades on ETFs, making it easy and affordable for investors to build a portfolio with diversification.
  • Place a market order: After your account is set up, place a market order to buy the desired leveraged gold ETF shares. When placing a market order, be sure to limit the amount you are willing to pay for the ETF, as prices can fluctuate rapidly.
  • Monitor your investment regularly: Ensure your investment continues to align with your goals and risk tolerance. Proactively managing your investment can help you make informed decisions and adjust your strategy if necessary.

How to trade gold leveraged ETFs?

Leveraged gold ETFs can be traded in the same way as traditional ETFs through a brokerage account. The first step in trading leveraged gold ETFs is to decide on your investment strategy. This includes determining your risk tolerance, investment objectives and time horizon. You should also research the different leveraged gold ETFs available and compare their past performance, expense ratios and other important factors.

Once you have selected a leveraged gold ETF to invest in, you can open a brokerage account and place a market order; this serves as an instruction to buy or sell an ETF at the best available price on the market. Before investing, it is important to understand the risks associated with leveraged ETFs, including the potential for greater losses than traditional ETFs.

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Leveraged Gold ETFs FAQs

Are leveraged gold ETFs suitable for long-term investments or short-term trades?

Leveraged gold ETFs are suitable for both long-term investments and short-term trades, depending on the investor's strategy and risk tolerance. They offer amplified returns based on gold's daily price movements but come with high volatility and potential losses if the market moves against the investor. Short-term traders can capitalize on gold's short-term price movements because the leverage resets on a daily basis. At the same time, long-term investors can use them for exposure to gold as an investment or hedge against inflation and economic risks.

How do leveraged gold ETFs differ from traditional ETFs?

First, while traditional ETFs track the performance of an underlying index or asset, leveraged ETFs aim to deliver amplified returns based on the daily price movements of the underlying asset. Second, leveraged ETFs usually use financial derivatives, such as futures contracts and options, to achieve their objectives, while traditional ETFs typically hold a diversified portfolio of assets. Finally, leveraged ETFs tend to have higher fees than traditional ETFs due to the additional costs of managing leveraged positions and financial derivatives.

Can leverage gold ETFs be used to hedge against market volatility?

Leveraged gold ETFs can be used to hedge against market volatility as they can provide an investment vehicle that is inversely correlated to the broader stock market. This means that as the stock market goes down, the value of leveraged gold ETFs may go up. However, it is important to note that leveraged gold ETFs are not a perfect hedge against market volatility and may still be subject to fluctuations based on various market factors.

What types of assets can be tracked by leveraged Gold ETFs?

Leveraged gold ETFs typically track the price of gold, usually measured in ounces. Some leveraged gold ETFs may track other precious metals, such as silver and platinum. It is important to research the underlying assets of a leveraged gold ETF before investing to understand what assets are being tracked and how market factors may impact them.

Do leveraged gold ETFs cost more?

Leveraged gold ETFs generally have higher expense ratios than traditional ETFs due to the additional costs associated with leverage. These expenses can include interest on the borrowed funds used to purchase the leveraged assets, management fees, and other costs associated with maintaining the leveraged position.

Do leveraged gold ETFs offer greater returns than normal exchange-traded funds?

Leveraged gold ETFs can offer greater returns but also have a higher risk. Due to the use of leverage, the value of leveraged gold ETFs can fluctuate up and down in a short period of time. Investors should carefully evaluate their risk tolerance and investment objectives before investing in leveraged gold ETFs. It is also important to note that leveraged gold ETFs are designed for short-term trading and may not be suitable for long-term investments.

How we determined the information of leveraged gold ETFs

The information on leveraged gold ETFs presented in this article was obtained from various reliable sources, including financial news websites, ETF providers' official websites, and regulatory bodies such as the Securities and Exchange Commission (SEC). We also referred to reputable investment websites and resources specializing in ETF investing and market analysis.

To ensure the accuracy and relevance of the information, we cross-referenced multiple sources and conducted in-depth research on each ETF's investment strategy, past performance, fees and risks. Additionally, we reviewed historical data and analyzed market trends to provide a comprehensive overview of leveraged gold ETFs and their potential benefits and drawbacks.

Disclaimer: The information provided above is for educational or informational purposes only and should not be considered financial advice or a recommendation to buy or sell any securities