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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?
- How do leveraged gold ETFs work?
- The pros and cons of leveraged gold ETFs
- Leveraged gold ETFs to consider
- How to invest in leveraged gold ETFs
- Leveraged gold ETFs FAQs
- Summary of leveraged gold ETFs
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?
How do leveraged gold ETFs differ from traditional ETFs?
Can leveraged gold ETFs be used to hedge against market volatility?
What types of assets can be tracked by leveraged Gold ETFs?
Do leveraged gold ETFs cost more?
Do leveraged gold ETFs offer greater returns than normal exchange-traded funds?
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.