DUST: Bearish ETF Profits From Pullback in Gold Miners

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Gold miner stocks have been lagging gold prices lately, which has helped exchange traded funds that bet against the shares.

Traders often turn to leveraged and inverse ETFs to play short-term moves in the market. They can bet against sectors with inverse or bearish ETFs, although leveraged offerings normally don’t make sense as long-term holdings.

Despite rising gold prices, gold miners exchange traded funds have struggled to gain any ground. Why is there such a disparity in performance between gold and gold miners?

The performance divergence is a reminder that different factors can influence miner stocks vs. physical gold. The difference can be partly explained by the fact that investing in miner stocks introduces equity-like risks into a portfolio.

“The fund invests in the stocks of gold miners, not bullion. As such, this is an indirect play on gold prices, with all of the attendant risk that it might not serve as a good inflation hedge or remain in lock step with the trajectory of the gold market,” Morningstar analysts write in a profile of Market Vectors Gold Miners.

“These firms have enormous fixed-operating costs. Their cash flows - which is what you ultimately invest in when buying this fund - can swing much more dramatically than metal prices,” the analysts said. “That operating leverage and currency gyrations have made this fund’s index more than twice as volatile as the spot price of gold over the last one and three year time-frames.”

Direxion Daily Gold Miners Bear 2x Shares (NYSEARCA:DUST) has been doing quite well during the past few months as gold stocks underperformed. The fund is up about 16% the past three months.

The Direxion Daily Gold Miners Bear 2x tries to reflect a daily 200% inverse, or opposite, performance of the NYSE Arca Gold Miners Index.

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Direxion Daily Gold Miners Bear 2x Shares

Max Chen contributed to this article.