ETF Prime Archive

How to Access Gold With ETFs and ETNs

During periods of extreme inflation or deflation, gold has proven itself to be an investment alternative worth looking at and, recently, gold has started to outperform once again.

Whether it be fear that the U.S. government is printing too many dollars or that investors just want to add protection to their portfolios, it is important to understand the various choices one has in gold exchange traded products.

First, there are the ETFs which physically hold gold bullion.  These ETFs are taxed as collectibles at a long-term capital gains rate of 28%.  ETFs that hold physical gold are the SPDR Gold Shares (GLD, $32 billion in assets), the iShares COMEX Gold Trust (IAU, $2.5 billion in assets) and, the newcomer, ETFS Physical Swiss Gold Shares (SGOL, $129 million).  Were GLD a country’s central bank, it would rank sixth in the world, recently surpassing Switzerland, in its gold holdings.  Some may find IAU more attractive than GLD due to its smaller and less conspicuous (although not “small”) market footprint, whereas SGOL provides diversification regarding the country in which the metal is warehoused.

Secondly, there are ETFs which hold futures contracts in gold.  These include PowerShares’ DB Gold (DGL), Ultra Gold ProShares (UGL) and UltraShort Gold ProShares (GLL).  All three are organized as partnerships and are taxed as futures, that is 60% as long-term capital gains and 40% as short-term capital gains.  DGL is unique in that it aims to minimize losses from contango and maximize gains from backwardation by placing its holdings in one of any 13 months (front month plus 12) rather than maintained in front-month futures only, as are  UGL and GLL.  DGL is an unleveraged play, whereas UGL and GLL are both levered ETFs aiming to deliver twice the daily change in gold prices.

Thirdly, gold can be accessed through exchange traded notes, ETNs, which are debt instruments that track an index.  From a tax perspective, they are currently subject to the 15% long-term capital gains rate with holding periods of longer than one year.  These ETNs enable investors to short the gold market or grab leveraged exposure to it.  Here are four gold-related ETNs:

•  PowerShares DB Gold Double Short ETN (DZZ)
•  PowerShares DB Gold Double Long ETN (DGP)
•  PowerShares DB Gold Short ETN (DGZ)
•  E-TRACS UBS Bloomberg CMCI Gold ETN (UBG)

Lastly, one can gain exposure to gold through gold mining stocks, via the Market Vectors Gold Miners ETF (GDX).  GDX currently holds 31 different gold mining stocks, offering company diversity, and carries an expense ratio of 0.55%; it is taxed using the traditional short-term and long-term capital gains rates.

There are wide-ranging choices when it comes to investing in gold, but keep in mind tax treatments and risk appetite when choosing which ETFs or ETNs are right for you.

New Mega-Cap ETFs

Three new iShares “Mega-Cap” ETFs made their debut last Friday – the iShares Russell Top 200 Index Fund (IWL), the iShares Russell Top 200 Growth Fund (IWY), and the iShares Russell Top 200 Value Index Fund (IWX).  All three funds seek to provide equity exposure to the largest of the large cap companies.

According to iShares, the Russell Top 200 Index “is a subset of the Russell 1000 Index and includes approximately 200 of the largest securities based on a combination of their market cap and current index membership, comprising approximately 65% of the US market”.  The Russell 1000 Index represents approximately 1,000 of the largest securities and comprises nearly 90% of total US market capitalization.

The Russell Top 200 Growth Index tracks the largest 200 companies in the Russell 1000 exhibiting traditional growth characteristics such as higher projected future earnings growth and higher price-to-book ratios while the Russell Top 200 Value Index tracks the largest 200 companies in the Russell 1000 with lower projected future earnings growth and lower price-to-book ratios.

The new Mega-Cap ETFs provide investors with an easy way to gain targeted exposure to the largest companies in the equity universe, enabling investors to more easily overweight these stocks.  Mega-Cap stocks are typically the largest, most stable companies and thus, investors may want to overweight them in times of market turmoil as a “safer” play than smaller, more volatile stocks.

Threat of Regulations Doesn’t Keep Commodity ETFs Down

In a time of uncertainty and hurdles for leveraged ETFs, the creator of the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG), the United States Commodity Funds LLC, has launched the newest member of its family, the United States Short Oil Fund (DNO).

This new fund is an inverse exchange traded fund which is designed to track the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the price changes of a designated benchmark futures contract on light, sweet crude oil traded on the New York Mercantile Exchange. 

The introduction of DNO comes at a time when the CFTC has been scrutinizing commodity ETFs.  Although the regulations have still not been imposed, many have felt threatened by the anticipation of the new restrictions, which have even forced some, like the PowerShares DB Crude Oil Double Long ETN (DXO) to shut down, knowing that the fund’s size would make it particularly vulnerable to position limits.

DNO will most likely face the same issues and problems that other commodity ETFs have; however, on the positive side, creation limitations may take awhile to kick in, but when they do, there is a good chance that this fund could be curtailed if it proves to be popular.

You Can’t Handle the Truth

Bloomberg believes that the public can “handle the truth” regarding the Federal Reserve’s activities with banks.

By Wednesday, we’ll arrive at another key juncture in the dispute pitting Bloomberg (and other media outlets) against the Federal Reserve (and a host of banks) over release of information detailing recipients, beneficiaries and parties to roughly $2 trillion in disbursements of funds and taking on of loans by the Federal Reserve since last October.

Bloomberg first filed suit for release of the information via the Freedom of Information Act last November.  Last month, U.S. Chief District Court Judge Loretta Preska issued a 47-page order demanding that the Federal Reserve, on behalf of the taxpayer, provide information detailing recipients of funding or loans and participants in the Federal Reserve’s emergency programs.

The deadline for complying with the order was August 31, but the Fed filed for and was granted a stay until September 30 at which point it must either comply or file an appeal.

The Fed and banks have argued that divulging the information could negatively impact the public’s confidence in some institutions and that the prospect of public disclosure might give banks pause in the future when contemplating participation in emergency programs involving the Fed.  The Fed appears to have much of the banking industry on its side.  If the Fed and those in the banking industry are correct, then an opening of the books to public viewing could lead to increased volatility in financials and, potentially, negative pressure on some institutions.

If no appeal is filed or if an appeal is rejected, here’s a slate of important banking and financial sector ETFs to keep an eye on: XLF, IYF, IYG, IAI, IAT, KBE, KRE, KCE, KIE and VFH.

The President, having expressed a commitment to transparency, is faced with an interesting dilemma: any appeal filed this week would be spearheaded by Solicitor General Elena Kagan – who reports to the President’s Attorney General Eric Holder.

With activities of the Federal Reserve presently so deeply imbued with the economic (and investment) landscape, this case may serve as a defining moment in relation to the extent and form of information on Federal Reserve activities and the banking system to which the public has access during the coming years.

How To Play the Dollar With ETFs

Recently, the US dollar has drawn much attention as it has rebounded from a one-year low against the euro, its volatility has influenced commodity prices and a carry trade in the currency has emerged.

The Federal Open Market Committee (FOMC) has acknowledged that the US economy is emerging from a prolonged recession, however, at the same time the Federal Reserve has announced that it will maintain its near-zero interest rate into 2010.  This low interest rate, in conjunction with the dollar’s price levels and its easiness to borrow make it the perfect funding currency for carry trades.

Carry trades are when investors borrow a currency at negligible interest rates to invest in higher yielding currencies, and this can be detrimental to the currency being borrowed – in this case the dollar. 

The dollar also faces downward pressure as investors’ risk appetite increases.  As the global economy is slowly emerging out of a recession, many investors are starting to put their money into riskier investments which offer higher yields and take their money out of the dollar, which has traditionally been known as a safe-haven for international investors.  Lastly, the dollar has taken a hit by the massive amounts of money that the federal government has printed to bailout and aid the nation out of a recession.

As for the near future, the fundamentals of the dollar remain weak and the overall health of the global economy points to an unfavorable trend for the currency.  Whether or not you agree with the bearish case for the dollar, there are several ETF choices for both bears and bulls.

To short the dollar, one can choose the PowerShares DB US Dollar Index Bearish (UDN) and if one thinks that the dollar is going to rally, the PowerShares DB US Dollar Index Bullish (UUP) is a good play.  To get a bit more creative, one can consider the PowerShares DB G10 Currency Harvest (DBV), which holds long futures contracts on the three G10 currencies associated with the highest interest rates and short futures contracts on the three G10 currencies with the lowest interest rates.