A number of exchange-traded funds (ETFs) are devoted exclusively to gold, a precious metal valued both for its industrial uses and its use as a store of value. The shiny metal is used in jewelry and is a key component in a number of electronics products. Investors have long viewed gold as a hedge against inflation and as a safe haven in times of economic turmoil. Gold ETFs provide investors with a way to take advantage of gold's unique investment characteristics, whether it's by tracking the price of the physical commodity or through shares of companies that mine the metal.

Key Takeaways

  • Gold futures contracts underperformed the broader market over the past 12 months.
  • Two of the four leveraged gold ETFs, which are UGL and DGP, offer 2x daily long leverage. The other two, which are GLL and DZZ, provide 2x daily short leverage.
  • These ETFs invest in futures contracts to take leveraged positions in gold.

Gold investors looking to amplify returns might consider a leveraged ETF. Unlike traditional ETFs whose portfolios are designed to track an index or commodity price on a one-to-one basis, leveraged ETFs use derivatives and debt to magnify the returns on the portfolio by a factor of two or even three. Though the use of leverage can lead to significantly higher gains, it can also lead to significantly higher losses, making leveraged funds much riskier than traditional ETFs.

Some leveraged ETFs amplify gains when the underlying index or commodity falls and amplify losses when the underlying index rises. These instruments are called inverse leveraged ETFs, and their added complexity makes them even riskier than traditional leveraged ETFs. Both leveraged and inverse leveraged ETFs are extremely complex financial instruments and are not meant for beginner investors.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities they represent, and losses can amplify during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2x ETF may return 2% on a day when its benchmark rises 1%, but you shouldn't expect it to return 20% in a year when its benchmark rises 10%. For more details, see this SEC alert.

There are four leveraged gold ETFs that trade in the U.S. Some of these funds are relatively small with low assets under management (AUM) and/or low trading volumes. For example, the DB Gold Double Long Exchange Traded Notes (DGP) and the DB Gold Double Short Exchange Traded Notes (DZZ) have extremely low trading volumes, making them relatively illiquid and adding to the overall costs of trading them. Investors should also be aware that the websites of these two funds are no longer operational. These funds are considered extremely risky and should be used only by sophisticated investors. There also used to exist 3x leveraged gold ETFs, such as the VelocityShares 3X Long Gold ETN (UGLD) and the VelocityShares 3X Inverse Gold ETN (DGLD). But these funds were delisted, with the last trading day of these two funds taking place on July 2, 2020. There are no more gold commodity ETFs trading in the U.S. that offer 3x leverage.

The price of gold has retreated since peaking in early August 2020. After reaching a recent trough in March of this year, the price has made some gains but has moved mostly sideways since mid-June. The Bloomberg Gold Subindex, which reflects the price movements of gold futures contracts, is down 9.0% over the past 12 months. By comparison, the S&P 500 is up 31.2%, as of Aug. 31, 2021. However, investors should note that leveraged gold ETFs are not meant to track gold over long time periods. The leverage of these funds resets on a daily basis and they are not intended for long-term, buy-and-hold strategies. The price growth figure cited above is to be used only as a reference illustrating how gold has performed over the past year. All data below is as of Aug. 31, 2021. The first two ETFs listed below provide 2x daily long leverage to gold while the second two provide 2x daily short leverage. Each pair is ranked by daily trading volume, a measure of liquidity.

Inverse ETFs can be riskier investments than non-inverse ETFs because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.

2x Long Leverage: ProShares Ultra Gold (UGL)

  • 3-Month Average Daily Volume: 151,738
  • Performance over 1-Year: -20.3%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $249.4 million
  • Inception Date: Dec. 1, 2008
  • Issuer: ProShares

UGL is an ETF structured as a commodity pool, combining investor contributions to trade futures-based leveraged long positions in gold. The fund offers bullish investors daily investment returns (before fees and expenses), corresponding to 2x the daily performance of the Bloomberg Gold Subindex. Investors should be advised that this ETF resets on a daily basis and any investments in it should be monitored daily. Significant losses are possible, especially in volatile markets.

2x Long Leverage: DB Gold Double Long Exchange Traded Notes (DGP)

  • 3-Month Average Daily Volume: 10,227
  • Performance over 1-Year: -25.0%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $100.2 million
  • Inception Date: Feb. 27, 2008
  • Issuer: Deutsche Bank

DGP is structured as an exchange-traded note (ETN), a type of unsecured debt instrument that tracks an underlying index of securities and trades like a stock. ETNs share characteristics similar to those of bonds, but they do not make periodic interest payments. The fund provides 2x daily long leverage to the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold. It offers a powerful trading tool for investors looking to take a short-term bullish position in gold futures. Its leverage resets on a daily basis, meaning that returns are compounded when held for multiple periods. DGP is intended for sophisticated investors and is not meant for use in a long-term portfolio.

ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs, which can negate some of your investment gains or increase your losses.

2x Short Leverage: ProShares UltraShort Gold (GLL)

  • 3-Month Average Daily Volume: 96,706
  • Performance over 1-Year: 10.1%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $21.3 million
  • Inception Date: Dec. 1, 2008
  • Issuer: ProShares

GLL is an inverse leveraged fund that uses futures contracts to take a leveraged short position in gold. It's structured as a commodity pool. The fund offers daily investment returns (before fees and expenses), corresponding to -2x the daily performance of the Bloomberg Gold Subindex. GLL's leverage resets on a daily basis, resulting in compounded returns when held for multiple periods. This ETF is a powerful tool that can amplify returns and should be used only by sophisticated investors. Investors with a low tolerance for risk should avoid this fund.

2x Short Leverage: DB Gold Double Short Exchange Traded Notes (DZZ)

  • 3-Month Average Daily Volume: 5,367
  • Performance over 1-Year: 10.3%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $6.7 million
  • Inception Date: Feb. 27, 2008
  • Issuer: Deutsche Bank

DZZ is structured as an ETN and provides 2x daily short leverage to the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold. This fund is useful for investors looking to take a bearish short-term bet on gold. It is not meant to be held in a long-term, buy-and-hold portfolio. Also, investors should take note of the extremely low trading volume, which may make shares in the fund difficult to buy and sell.

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