PowerShares DB Gold and Silver use Deutsche Bank's Optimum Yield Index, which aims to maximize gains from backwardation (futures prices lower than spot prices) and minimize losses from contango (futures prices higher than spot prices). ProShares funds are leveraged and deliver double the daily change in prices.
Exchange-traded notes are debt instruments that track an index. These have more favorable tax treatment; they are taxed as stocks and subject to the 15% long-term capital gains rate.ETNs, however, expose the investor to the credit risk of the issuer. Investors should be mindful of this special type of risk before they purchase these funds. The gold ETNs include PowerShares DB Gold Double Short ETN (DZZ), PowerShares DB Gold Double Long ETN (DGP), PowerShares DB Gold Short ETN (DGZ) and E-TRACS CMCI Gold Total Return (UBG). The silver ETN is E-TRACS CMCI Silver ETN (USV). As with the PowerShares DB ETFs, Gold and Silver ETNs use the Optimum Yield Index. The leveraged ETNs deliver twice the monthly change in gold or silver. E-TRACS CMCI, 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 (or silver) contracts."
Stock ETFsThe gold ETF is Market Vectors Gold Miners. This fund tracks the NYSE Arca Gold Miners Index, which tracks companies primarily engaged in gold mining. GDX currently holds 32 stocks and top holdings include Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM), and AngloGold Ashanti Limited ADR (AU).
Assessing Risk ToleranceChanges to leveraged and/or futures-based commodity funds could be damaging to the structure of corresponding gold and silver ETFs. As regulation is hashed out, the average investor is better off gaining exposure to these metals through physical or equity based instruments. Only sophisticated investors should consider leveraged products. 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. -- Written by Don Dion in Williamstown, Mass.
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