By Leks Gerlak
At a Glance
- As the exchange-traded product landscape continues to evolve, the largest provider of leveraged and inverse ETFs has embarked on another first in indexing.
In January, ProShares changed its silver and gold ETFs to track futures-based indexes. This marks the first time leveraged and inverse ETFs will benchmark to gold and silver futures prices. Our silver and gold ETFs (AGQ, ZSL, UGL and GLL) are changing their benchmarks from the LBMA (London Bullion Market Association) silver and gold auction prices to Bloomberg Commodity Subindexes.
So, how did we get here? A number of factors drove us to change the way we obtain exposure for our silver and gold ETFs, but understanding the gold and silver exchange-traded product (ETP) landscape is an important starting point.
Pricing for Physical Gold and Silver
Among the $60 billion in overall silver and gold ETPs, about 98 percent of the assets are in funds that hold physical commodities, including the well-known SPDR Gold Shares ETF (NYSEARCA:GLD) and iShares Silver Trust ETF (NYSEARCA:SLV). Funds that hold and transact in physical commodities are generally benchmarked to a "spot" price, which in the case of silver and gold is the LBMA spot auction price. The spot price is simply the price at which a commodity can be delivered on right now.
Gold and silver ETPs that employ leverage and rebalance in accordance with their daily objectives, however, use derivatives to obtain exposure instead of transacting in physical commodities. Most leveraged and inverse silver and gold ETPs have historically obtained their exposure through forwards-negotiated OTC contracts between individual institutions. However, financing costs from forwards can be significant, and there are trading fees for forward counterparties to participate in the London auctions.
Lower Costs, Aligning Schedules
The move to futures-based indexes presents the opportunity to replace the high costs associated with using forwards with a more cost-efficient model using futures contracts. This can also enhance fund tracking. Furthermore, the futures are centrally cleared, unlike forwards.
In terms of enhanced operational efficiency, the transition means trading schedules can be aligned with U.S. markets. LBMA holiday schedules don't match U.S. markets, which can cause disconnects in performance and prevent ProShares from rebalancing on days where U.S. markets are open but London markets are closed.
Futures-based indexes also provide greater transparency than using forwards. The COMEX futures market offers nearly 24-hour trading through a clearing house and highly standardized contracts with deep liquidity. Additionally, the LBMA auctions have experienced disruptions in the past, and the U.S. regulatory structure associated with the COMEX ensures strong marketplace integrity.
ProShares chose a leading commodity index provider in Bloomberg, which offers a range of indexes, including oil, natural gas, agriculture, silver and gold. The ProShares suite of leveraged and inverse crude oil and natural gas ETFs, with over $500 million in assets under management, already use Bloomberg Commodity Subindexes. This transition of the silver and gold funds to Bloomberg indexes will create consistency across the rest of ProShares' commodity suite.
Big Year Ahead for Silver and Gold?
Tapping COMEX futures comes at a time when gold and silver may have a spotlight year. Gold, for example, has traditionally been a safe haven asset that has done well during political uncertainty. Historically, gold has also been sensitive to rising interest rates, as they often lead to a rising dollar, making gold more expensive to buyers in other currencies.
2019 could bring increased volatility to gold and silver prices, making leveraged and inverse ETPs a sought-after vehicle for active traders and hedgers. ProShares gold and silver ETFs enter 2019 with a fresh look - leveraging the COMEX's deep liquidity, around-the-clock transparency, and sizable futures market.