PowerShares vs. iShares vs. streetTracks Gold and Silver: Material Differences

Roger Nusbaum submits: I have written many times that if you use investment products like ETFs you need to stay on top of new products that come out in case they are better than existing products. I have started to wonder if the DB Gold ETF (DGL) and DB Silver ETF (DBS) might be better to use than streetTRACKS Gold (GLD) or iShares Silver (SLV). GLD is a client holding.

DGL and DBS own mostly treasury bills and enough futures contracts to create the exposure. The big plus is that the interest on the T-bills pays the fee, and could pay out to shareholders after the fee is covered. The big negative is that contango could work against the performance of the fund. DB uses something call Optimum Yield, which allows to cherry pick the best contract to roll to. In theory contango on any roll forward could be a money loser.

With GLD and SLV holding the actual metal contango is not an issue, but both funds have a fee that has to be covered. They sell a little of the metal to cover the fee, and in a few years the difference could matter. Some would say it matters now.

It seems to me that if Optimum Yield works (it is too early to know now), then the total return from DBS and DGL would be higher than GLD and SLV. DBS and DGL would provide the returns of the metal plus treasury interest (no guarantee it will pay of course), whereas GLD and SLV provide the returns of the metal minus the fee.

I am not saying I am the first one to think of this, but I can't recall reading about it anywhere. I don't think it can be known for a while whether this can stand up, but I wonder.

Further, although far from my skill set, I wonder if this, if it even exists, could create some sort of unintended consequence due to potential arbitrage as is going on with the MacroShares.

For its part, DB says that interest from treasuries will pay out once a year in a special dividend -- that is if there is anything to pay.

Comments

[Riverboat:]

Good description. What's your take on gold miners as part of the investment mix or as leading indicators?

2007 Jan 31 10:44 AM

[Roger Nusbaum:]

most clients have exposure via one of the big diversified foreign miners. As a leading indicator, for now I still think that the old stand by of the copper companies tend to be the best evidence of this, perhaps this is changing to include nickel and the like but a lot has changed since the current expansion started so i am not sure.

2007 Jan 31 06:47 PM

[Sufiy:]

Canadian Capped Gold Index is in bullishFlag formation:

sufiy.blogspot.com/200...

Regards,

Sufiy.

2007 Feb 03 04:38 PM

[dave123:]

Don't forget CEF (Central Fund of Canada (AMEX:CEF)) when looking at ETF's/Close Ended funds for gold and silver exposure. No derivative holdings or other twists, just pure physical bullion.

2007 Feb 04 12:01 PM

[Roger Nusbaum:]

Actually I don't write about CEF enough, you are right to mention it, it absolutely has a seat at this table.

2007 Feb 05 02:59 PM