Types of ETF Gold Funds

Posted on March 7, 2010 | Category: Money Trivia

While a fund may call itself a ETF gold fund, not all of them are equal. There are major differences in the way they are constructed and this can have important consequences on the investment strategies of an investor.

The most direct types of funds actually own gold bullion. Each share typically represents 1/10 of one ounce of gold. These funds will track changes in spot price of gold fairly accurately. Examples of these funds are the iShare COMEX Gold Trust and SPDR Gold Trust.

One step removed are the gold ETF’s that do not hold gold assets directly, but instead invest in futures contracts. The most notable of this type of fund is Power Shares DB Gold Fund. These funds have historically followed spot price fluctuations fairly well.

Some funds, such as Power Shares Global Gold and Precious Metals ETF, track the fluctuations of the NASDAQ OMX Gold and Precious Metals Index. This fund follows the performance of individual companies involved in gold and other precious metals operations. The underlying assets in this case are in reality common stocks, hence this type of ETF is not actually a direct investment in gold and the price may deviate significantly from spot changes in gold prices.

There is a leveraged gold ETF, ProShares Ultra Gold, that tries to provide 2-3X the daily return of changes in the spot price of gold. They do this by further investing in derivatives such as swaps, options, futures, and forward contracts. As with any leveraged position, the returns can vary significantly and they don’t always achieve their target objectives.

Finally, if you are bearish or need downside protection, an inverse gold ETF is available. The PowerShares DB Gold Short ETN is based on the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold and its performance has shown an almost perfect negative correlation to the asset-backed ETF’s.

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