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3 Supercharged ETFs To Beat Gold Price Returns

by Darwin on September 21, 2010

Gold continues to breach new highs weekly, with Tuesday being no exception, and regardless of comparisons to prior bubbles, the near term trend has continued unabated.  While the pure play on gold is physical ownership of bullion, there are many drawbacks to taking possession of this precious metal, especially for typical retail investors.  First of all, the transaction costs are expensive.  The internet abounds with scams and high priced transactions whereby gold may need to rise over 30% to just break even from transaction costs.  Next, there’s the transportation, security, and then exit strategy for physical ownership.  Finally, there’s the gold tax rate rules to consider since it’s taxed as a “collectible”.

The most popular ETF to get exposure to straight gold bullion is the (GLD) ETF which has served investors very well to date.  There are some conspiracy theorists who believe the fund is essentially a scam and that there’s no underlying gold or collateral in its possession and eventually it will collapse completely when there’s a run on sales of shares in the ETF.  That doesn’t seem plausible to me given the publicity it’s received, the notion that some of the largest and most astute hedge fund managers in the world rely on it, and the custodian of the gold is HSBC, a very legitimate company.

That aside, there’s another physical gold ETF by Sprott (PHYS) which has the unique aspect of allowing investors to take physical custody of a portion of their shares.  For that reason, this ETF is viewed as being more safe and legitimate.  However, that comes with a price.  Since this is a closed end fund, it has always traded at a premium to its underlying net asset value.  This premium swings over time and sometimes it runs a bit out of control which happened earlier on in its launch.  As evidenced in this gold ETF pairs trade, I made very easy money with a long/short position and took on virtually no risk.  If considering this ETF, just ensure you buy it when the premium’s at the lower end of its historical range.

3 Supercharged ETFs Beating GLD

In the quest to actually exceed the returns of gold bullion though, investors may want to consider moving further into the risk spectrum for exposure to higher returns (and losses when gold drops).

GDXJ - MarketVectors Gold Miner Juniors – This ETf consists of smaller exploration and mining companies and is much more volatile than larger, more established mining firms.  As such, when gold runs, the speculative nature of these shares results in a rally leveraged to the price of gold.

UGL – ProShares Ultra Gold – This is a 2X daily leveraged gold ETF.  See more below on performance and risks of leveraged ETFs.  Short term, so-so. Long term, no-no.

AGQ – Proshares Ultra Silver – This 2X daily silver ETF may actually provide even higher returns than UGL.  Gold and silver often trend together and of late, silver has been on a run.  If you already have gold exposure elsewhere and want another leveraged precious metals play, this would be your choice.  While there’s a platinum ETF and one for palladium as well, there are presently no leveraged funds for those metals.

Below is a table of the prior 1 month, 3 month and 6 month returns compared to GLD:

(click to enlarge)

As you can see, all options beat the underlying returns on gold bullion over the time periods evaluated.  I do want to point out however, that for leveraged ETFs, due to value decay over time from daily resets, if you hold these instruments long enough, and the trend breaks at all (which all trends do, or at least fluctuate), they will begin to lose value and can actually decline quite a bit in a flat market.  So, buyer beware – leveraged ETFs are best for days/weeks, not months or longer.

Disclosure: Long GLD and paired short positions in AGQ and UGL – full portfolio updates and explanations here [most recent month return 10.5% vs 5.8% for SPY].

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