Short Gold With These ETFs

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Includes: DGLD, DGZ, DZZ, GLD, GLL, UUP
by: Zacks Funds

The rally in gold ETFs that was spurred by the safe haven demand in the wake of the Chinese market rout, overall global growth worries and nagging oil price declines at the start of 2016, has started to lose steam.

Possibilities of another Fed rate hike as early as in April, given stronger U.S. economic numbers and an upward shift in Q4 GDP data have added strength in the greenback lately. Notably, PowerShares DB US Dollar Bullish ETF (NYSEARCA:UUP) added over 1.3% in the last five trading sessions (as of March 24, 2016). As a result, a surging greenback weighed on the yellow metal as these are mostly priced in the U.S. dollar.

Also, rate hike talks pushed up the U.S. Treasury bond yields in recent times, which in turn wrecked havoc on non-interest bearing assets like gold. In any case, the outlook for gold investing was appalling.

The metal saw its third consecutive annual decline in 2015, being crushed heavily by the strength of the greenback in the wake of the Fed policy tightening, demand-supply imbalances and tepid global inflation (especially in the developed markets). As a result, the largest gold bullion ETF SPDR Gold Shares (NYSEARCA:GLD) lost over 11% in 2015, followed by a 3.8% decline in 2014 and 28.8% in 2013.

Now the renewed talks of Fed tightening have cast a shadow over this space. The price of gold fell to the lowest level in more than a month of late. Following the Fed meeting in mid-March, which indicated two more hikes this year, the largest gold bullion ETF SPDR Gold Shares saw asset outflow of $844.9 million from March 20 to March 27, 2016.

As a result, investors who are bearish on gold right now may want to consider a near-term short on the precious metal. Below, we highlight a few such options.

DB Gold Short ETN (NYSEARCA:DGZ)

This ETN has an inverse (opposite) relation to the movement of gold prices and thus creates a short position in the underlying index. It has managed assets of $23.9 million so far in the year and trades in average daily volume of more than 200,000 shares. This suggest a relatively wide bid/ask spread increasing the total cost for the product beyond the annual fees of 75 bps. DGZ added about 2.7% in the last five trading sessions (as of March 24, 2016).

DB Gold Double Short ETN (NYSEARCA:DZZ)

This ETN seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold, as per etfdb. The note charges 75 bps in fees per year from investors.

The product has amassed about $52.8 million in AUM. The ETN generated impressive returns of about 4.4% in the last five trading sessions (as of March 24, 2016).

ProShares Ultra Short Gold ETF (NYSEARCA:GLL)

This fund seeks to deliver twice the inverse return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. The product is expensive when compared to the other geared options in the space, charging 95 bps in fees a year. The $60-million fund trades in average daily volumes roughly 30,000 shares. The ETF gained 5.6% in the last five trading days (as of March 24, 2016).

VelocityShares 3x Inverse Gold ETN (NASDAQ:DGLD)

This product provides three times (300%) short exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus a daily accrual equal to the return that could be earned on a notional capital reinvestment at the 3-month US Treasury rate less the daily investor fee.

The ETN has been able to amass an asset base of $18 million. The product is a high cost choice in the gold bullion space, charging 135 bps in fees per year from investors. Additionally, it has a wide bid/ask spread given its small average daily volume of 60,000 shares that increases the total cost of the product. Not surprisingly, the note returned an excellent 8.8% in the last five days (as of March 24, 2016) buoyed by negative sentiments for gold across the globe.

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