With gold's downward momentum accelerating, interest is climbing in inverse gold ETF and ETN products. In order to help investors sort through the details of this space, this article will quickly examine the inverse gold product set available, understand what these products track and review four steps to follow before investing in any inverse or leveraged product.
The Product Set
There are five inverse gold ETPs: three inverse gold ETNs and two inverse gold ETFs. Remember ETNs differ from ETFs because they are considered a debt obligation of the issuing company and therefore investors take on credit risk. In contrast ETFs are backed by the underlying holdings of the ETF, not the issuer. Here's the names and tickers of inverse gold ETPs from GoldETFs.biz.
There is one product that delivers 1x the daily inverse return of physical gold (DGZ), two products that deliver 2x the daily inverse return of physical gold (DZZ), GLL and one product (DUST) the delivers 3x the daily inverse return of gold mining stocks. DGLD is a daily 3x play on gold, but also includes a Treasury component, as the index it tracks generates a small amount of income. Here's a handy decoder chart.
Real World Return Example
How have these products added to the gold investor's toolbox? Consider yesterday's market performance. Physical gold was down 1.68% for the day as represented by GLD and gold mining stocks were off 3.82% as represented by GDX. The five inverse gold products gained between 1.5% and 11.28% for the day. Here's Wednesday's performance chart including all Gold ETF and ETN products sorted by single day return.
As evidenced yesterday, inverse gold ETF and ETN products can provide attractive tactical investment opportunities when gold declines.
Volume and AUM Metrics
Of course when dealing with inverse and leveraged ETP products, questions always arise about the size of trading volume and amount of assets invested in the ETP. Here's the GoldETFs.biz chart of all inverse and leveraged gold ETPs, sorted by volume and displaying asset size as well.
Four Steps To Follow
Finally, I believe there are four steps to follow before purchasing an inverse or leveraged ETF. These steps will ensure results that correspond with your investment intentions.
1. Determine the direction - It sounds simple, but begin by narrowing down the ETP options by the direction of your trade.
2. Determine the factor - Decide on the amount of leverage that is appropriate from 1x to 3x.
3. Determine the index - The index the product tracks determines its return so be sure to understand what the index actually owns by reading the index description.
4. Confirm the ticker - Before placing a trade, double check the ticker matches your direction, factor and index decisions. As these products are leveraged and often have similar tickers between long and short versions, double checking will prevent big errors.
Leveraged and inverse gold ETPs, if properly understood and executed on, can be a profitable short term addition to a tactical allocation. To that end, this article was designed to quickly equip investors to make more informed decisions when using these unique products. As always, be sure to read and understand the prospectus before investing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Christian Magoon publishes GoldETFs.biz.