Ultimate Guide to Gold ETFs and ETNs

Gold Futures ETFs

The following funds hold gold futures contracts and are organized as partnerships. They are taxed as futures, with a 60% long-term capital gains rate and a 40% short-term capital gains rate. Each investor in these funds is responsible for paying annual taxes and receives a Schedule K-1 form every year reporting his or her share of the fund's income.

• PowerShares DB Gold(DGL)
• Ultra Gold ProShares(UGL)
• UltraShort Gold ProShares(GLL)

PowerShares DB Gold uses Deutsche Bank's Optimum Yield Index, which aims to maximize gains from backwardation (a situation where futures prices are lower than spot prices) and minimize losses from contango (when futures prices are higher than spot prices). The ProShares funds are leveraged and deliver twice the daily change in prices.

Exchange-Traded Notes

Exchange-traded notes are debt instruments that track an index. These have more favorable tax treatment than the ETFs we discussed because they are taxed as stocks and subject to the 15% long-term capital gains rate. However, they do expose the investor to the credit risk of the issuer.

• 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)

The PowerShares DB Gold ETNs use the Optimum Yield Index, just like the PowerShares DB Gold ETF does. The leveraged ETNs, meanwhile, deliver twice the monthly change in gold. Lastly, the E-TRACS CMCI Gold ETN, issued by UBS, tracks a basket of futures spread across five maturity dates and "is designed to be representative of the entire liquid forward curve of the gold contracts."

Stock ETFs

• Market Vectors Gold Miners ETF (GDX)

We've already mentioned this ETF and its robust recent performance. This fund mimics the New York Stock Exchange Arca Gold Miners Index, which tracks companies primarily engaged in gold mining. The fund currently holds 31 stocks, and top holdings include Barrick Gold(ABX), Goldcorp(GG), Newmont Mining(NEM) and Compania de Minas Buenaventura(BVN).

Choosing Your Weapon

Investors with tax-sheltered accounts would be wise to avoid the ETNs because they would not capture the tax advantages, and also because the ongoing financial crisis increases the credit risk inherent with these products. The physical ETFs offer lower fees than the futures ETFs and, therefore, offer more value.

Leveraged ETFs and ETNs are generally unsuitable for all but the most sophisticated or aggressive investors. Because they reset at the end of each period, ProShares "daily doubles" are best for short-term trading measured in hours or a single session, while PowerShares "monthly doubles" are better suited for trades measured in days or weeks.

Gold miners perform best when the price of gold rises relative to the cost of inputs. Since the November 2008 lows, for example, the Market Vectors Gold Miners ETF has logged a 159% return. That's because after last year's market crash, gold prices held up and then increased, while a general deflationary trend lowered input costs for the miners. The combination left their shares undervalued.

Following is a table listing each instrument's fees and average volume.

Gold Investments ETF or ETN Name Fees (%) Average Volume (000s) SPDR Gold Shares (GLD) .40 15,829 iShares COMEX Gold (IAU) .40 508 PowerShares DB Gold (DGL) .50 58 ProShares Ultra Gold (UGL) .95 347 ProShares UltraShort Gold (GLL) .95 299 PowerShares DB Gold Double Short ETN (DZZ) .75 599 PowerShares DB Gold Double Long ETN (DGP) .75 2,124 PowerShares DB Gold Short ETN (DGZ) .75 40 E-TRACS CMCI Gold Total Return (UBG) .30 1 Market Vectors Gold Miners (GDX) .55 7,876

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