The only thing worse than a 500-point decline of the Dow Jones Industrial Average is another triple-digit drop during the same week. Knowing when the decline will stop or how far it will go is unknown. When it comes to portfolio protection, a "golden parachute" in the form of gold-focused ETFs can be the rock investors cling to in a storm. (To learn more about these investment products, read An Inside Look At ETF Construction.)

Opposite Reaction
One of gold's properties as a precious metal is that it does not react with most chemicals. In a similar fashion, when the overall stock market is in decline, investors searching for investments that aren't declining should set aside a portion of their portfolio for gold. On the day the Dow fell more than 500 points or -4.42%, the iShares COMEX Gold Trust ETF (AMEX:IAU), the SPDR Gold Trust ETF (NYSE:GLD) and the PowerShares DB Gold ETF (AMEX:DGL) each advanced 2.65%, 2.66% and 2.74%, respectively. (Learn about the history of gold in The Gold Standard Revisited.)

Gold Without The Bullion
DGL is the smallest and least expensive of the three ETFs with assets of $81 million and a market price just below $29. DGL is also the youngest ETF of the bunch, launching in January 2007. Unlike IAU and GLD, the DGL ETF does not actually hold gold bullion. DGL tracks the Deutsche Bank Liquid Commodity Index - Optimum Yield Gold Excess Return. The Gold Excess Return index consists of gold futures contracts and three-month U.S. Treasury securities.

The market prices of IAU and GLD are closer to the actual prices of gold bullion as displayed by gold futures contract prices. IAU has more than 1.9 million ounces of gold in trust. That's equal to nearly 60 tons or almost the equivalent weight of (40) 2008 4-Door Honda (NYSE:HMC) Accords. GLD has over 600 tons of gold in trust equally the weight of about 409 Accords.

The SPDR S&P 500 Index ETF (AMEX:SPY) traded down with the market, finishing -4.76% on the day of the 500-point market decline. The parachute effect of holding gold is apparent by noting that while SPY has declined -17.9% for the year, IAU, GLD and DGL were each down -5.9%, -5.9% and -7.3%, respectively.

Final Thoughts
The heavy bricks that investors think of when ideas of holding gold are conjured can be related to the weight of stability that gold ETFs can provide to a portfolio consisting strictly of equity. Investors should consult with a tax professional before investing in ETFs that hold physical commodities like gold bullion.

To learn more, read our related article The Gold Showdown: ETFs Versus Futures.

Related Articles
  1. Mutual Funds & ETFs

    Why ETFs Are a Smart Investment Choice for Millennials

    Exchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
  2. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  3. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  4. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  5. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  6. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  7. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  10. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>

You May Also Like

Trading Center