WHAT IS 'Double Gold ETF'

A double gold exchange-traded fund tracks the value of gold and responds to movements in the same manner as an otherwise similar double-leveraged ETF. With a double gold ETF, the spot value of gold or a basket of gold companies acts as the underlying for the fund. The ETF attempts to deliver price movements equal to double the movements of the underlying gold value.

BREAKING DOWN 'Double Gold ETF'

A double gold ETF strategy has the potential for significant profits; however, it is important to note that the risk that can be incurred can also be significant. Double gold ETFs are by no means a unique fund product. There are numerous leveraged ETFs that aim to deliver movements equal to two or more times the movements of their underlying components. Some examples include leveraged ETFs on natural gas and crude oil. These ETFs can also aim to mimic an inverse movement relative to the underlying. Such ETFs are known as inverse or bear ETFs

Reviewing leveraged ETFs

The first leveraged ETFs came to the market in 2006, after an almost three-year review by the Securities and Exchange Commission. Leveraged ETFs mirror an index fund, but they use borrowed capital in addition to investor equity to provide a higher level of investment exposure. Typically, a leveraged ETF will maintain a $2 exposure to the index for every $1 of investor capital. 

The fund's goal is to have future appreciation of the investments made with the borrowed capital to exceed the cost of the capital itself. Leveraged ETFs offer investors a prepackaged form of leverage that does not necessitate the requirements and complications that come with investing in swaps or derivatives. Investors who purchase leveraged ETFs will reap exponentially larger profits from underlying price movements if the benchmark index or market moves in the desired direction. But those who use these instruments will face the same disadvantage as investors who purchase securities on margin or use any other form of borrowing to finance their investments.

Leveraged ETFs offer the possibility of significant returns for traders who understand how they work and the risks that accompany them. On the other hand, novice investors may want to consider the regulatory warnings and steer clear of these investment vehicles. Although they can be valuable additions to a portfolio under the right circumstances, they can also produce substantial losses over time if they are not monitored closely. 

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