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Published: Jun 27, 2023 10 min read

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Gold exchange-traded funds (ETFs) are a popular investment instrument for those seeking diversification and exposure to gold without having to buy physical gold.

Leveraged gold ETFs, unlike traditional ETFs, can provide enhanced returns to investors by using borrowed funds, which may make them attractive to some investors. But they also significantly increase your risk for larger losses and are meant for only experienced investors who understand the downsides.

Below, we provide an overview of leveraged gold ETFs, how they work and the different options available.

Table of contents

What are leveraged gold ETFs?

ETFs are a type of investment fund that typically track the performance of a specific index, commodity, sector or asset class and offer investors the opportunity to gain exposure to a diversified portfolio of assets through a single investment vehicle. They trade on stock exchanges, much like individual stocks. Some investors who want to invest in gold choose to purchase precious metals ETFs rather than physical gold bullion because of the convenience and liquidity.

A leveraged gold ETF is a risky type of gold 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.

These ETFs are primarily used for short-term investing strategies rather than long-term investments. Daily rebalancing and compounding effects of leverage make these ETFs more suitable for capturing short-term price movements in the underlying gold index.

It’s important to note that leveraged gold ETFs have inherent risks that investors should carefully consider. Using leverage can lead to increased gains but can also significantly magnify the potential for losses. Leveraged gold ETFs are typically only recommended for experienced investors comfortable with higher risk and volatility.

Inverse leveraged gold ETFs

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 inverse to the daily movements of gold prices. Also, they are primarily used by investors who want to speculate on falling gold prices or hedge against losses in their gold holdings.

Inverse leveraged gold ETFs come with significant risks. They use derivatives and short-selling techniques, introducing additional complexity.

How do leveraged gold ETFs work?

Leveraged gold ETFs seek to amplify the performance of gold by using leverage, which means borrowing money to invest in derivatives such as futures, options or swaps. The ETF issuer will then use this combination to create a leveraged exposure to gold.

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. The price of gold is subject to fluctuations in supply and demand, 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, investors may seek out safe-haven assets such as gold and other precious metals during war or global economic uncertainty. High demand could drive up the price of gold and, in turn, the price of leveraged gold ETFs.

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 without owning the physical metal. 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.

Leveraged ETFs are traded on stock exchanges, where investors can easily buy and sell shares anytime 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 of using leverage. Because leveraged ETFs are designed to provide two or three times the daily total 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.

Leverage also requires additional management and trading costs, which are passed on to investors through higher fees than non-leveraged ETFs.

Overall, they are sophisticated financial instruments that should not be considered by beginner investors.

Leveraged gold ETFs to consider

The following table contains a list of leveraged gold ETFs available, according to ETF data and analytics company VettaFi.

ETF Name and Ticker Inception Date Assets Under Management Expense Ratio
ProShares Ultra Gold (UGL) December 2008 $187.19 million 0.95%
DB Gold Double Long ETN (DGP) February 2008 $82.44 million 0.75%
WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE) March 2022 $8.69 million 0.20%
DB Gold Double Short ETN (DZZ) February 2008 $4.49 million 0.75%

How to invest in leveraged gold ETFs

Before investing in leveraged gold ETFs, it’s crucial to research your options. You can review the prospectuses and fact sheets, which 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 from a financial advisor to understand the ETF's risks and potential rewards better.

Consider your investment goals and risk tolerance when deciding how much money to allocate to this investment. Leveraged gold ETFs are sophisticated products that carry high risks.

You can purchase a leveraged gold ETF with the following steps:

  • 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 diversified portfolio.
  • Purchase the ETF: After setting up your account, you can place a market order to buy the desired leveraged gold ETF shares. You may want to consider a limit order, which allows you to select the highest 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. Again, these ETFs are better suited for short-term investing at the hands of experienced investors.

How to sell leveraged gold ETFs

Selling gold exchange-traded funds (ETFs) is similar to trading them through a brokerage account. Consider factors such as market conditions, your investment horizon and any changes in your risk tolerance.

You can sell them within your online brokerage account by placing a sell order for the desired quantity of shares, specifying the order type. A market order instructs the broker to sell the ETF at the prevailing market price, while a limit order allows you to set a specific price at which you are willing to sell.

Before finalizing the sell order, it’s crucial to consider any associated costs, such as transaction fees or commissions charged by the brokerage. Remember that selling gold ETFs may have tax implications, so it's advisable to consult with a tax professional to understand the potential tax consequences of your sale.

Leveraged Gold ETFs FAQs

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

Leveraged gold ETFs are more suitable for short-term trades. They offer amplified returns based on gold's daily price movements but come with high volatility and potential losses. Short-term traders can capitalize on gold's short-term price movements because the leverage resets on a daily basis.

How do leveraged gold ETFs differ from traditional ETFs?

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. 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. Leveraged ETFs also tend to have higher fees than traditional ETFs due to the additional costs of managing leveraged positions and financial derivatives.

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

In general, gold is considered a safe haven that investors often use to hedge against volatility. Gold tends to maintain or even increase its value as other investments — like real estate or stocks — fall. Investors may use gold ETFs to hedge against market volatility. However, it's important to note that leveraged gold ETFs are risky investments and aren't a perfect hedge against market volatility — they 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's 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 — the fee you pay for the management of your fund — than traditional ETFs due to the additional costs associated with leverage and management. 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 much 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's also important to note that leveraged gold ETFs are designed for short-term trading and may not be suitable for long-term investments.

Summary of leveraged gold ETFs

  • Leveraged gold ETFs offer investors exposure to gold without requiring them to own physical gold, and allow for convenient trading and diversification.
  • These ETFs amplify the performance of gold by using leverage and financial derivatives.
  • Leveraged gold ETFs are better suited for experienced investors with a clear understanding of the risks involved.
  • Pros of leveraged gold ETFs include convenience, the potential for higher returns and ease of trading.
  • Cons include a significantly increased risk and higher fees compared to non-leveraged ETFs.
  • To invest in leveraged gold ETFs, open a brokerage account, purchase the ETF through a market or limit order and monitor your investment regularly.
  • Leveraged gold ETFs differ from traditional ETFs in their approach to increasing exposure and often have higher fees.

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.