Just look at the bank's gold product, the
PowerShares DB Gold
. In the months since its January launch, investors have given the fund a cavernous yawn. Accumulated assets totaled a paltry $26.3 million by the end of March -- about where it started -- and average daily volume currently runs at an anemic 22,000 shares.
In fact, it has made so little impact as a gold investment that Jeff Christian, guru of all things gold and managing director at New York-based specialty consulting firm CPM Group, said he'd never even heard of the DB Gold ETF and couldn't comment further on it.
It's not as if gold investing is out of fashion. The granddaddy of
streetTracks Gold Shares
, picked up an additional 31 tons of gold during the first quarter, worth almost $700 million at today's prices. It brings the fund's recent total holdings to roughly 500 tons, or almost $11 billion.
The question is: Why is the DB Gold ETF faring so poorly? It could be that the fund's designers at Deutsche Bank Commodity Services were too clever.
Pulling Double Duty
The ETF, which tracks gold futures prices, is meant not only to overcome the long-standing problem with futures investing of "negative yield roll" but also to provide tax advantages.
The thesis seems reminiscent of the old joke that an actuary is someone who tells you about a problem you didn't know you had, in a manner that you can't understand.
Could the fund's main boast, that it uses its proprietary "Optimum Yield" to "minimize the effects of negative roll," be just too sophisticated a concept?
So what is "negative roll," and why should its effects be minimized? Because futures prices tend to decrease the closer they get to expiration, the act of rolling positions forward eats into the underlying capital. In essence, it's buy high and sell low, but repeatedly for incrementally small losses that add up over time. The DB solution is to use the interest from margin deposits against the futures contracts to offset the economic drag.
The problem is that it's difficult to gauge for whom Optimum Yield was designed to appeal.
"Sophisticated hedge funds are probably going to do this type of trade themselves," says Ron DeLegge, editor of
, in reference to Optimum Yield-style techniques, about which Wall Street whiz kids already know. "I think this would appeal more so to a retail investor who doesn't have the knowledge or savvy to get exposure to that market."
Or to put the conundrum another way: The Optimum Yield feature would appeal to someone who likely has little interest in the sector.
It's worthwhile to note that streetTracks Gold Shares actually has an equivalent negative-yield problem -- the cost of storage and insurance is covered by selling minuscule quantities of the bullion over time -- but that clearly hasn't stopped new money from pouring in.
The Tax Benefits
The DB Gold fund's other implicit feature, improved taxation consequences, might be another "so what" feature.
Because the DB Gold product holds futures, it's eligible for tax treatment that could be preferential relative to holding raw bullion, explains Deanna Flores, tax counsel at fund manager Vanguard in Valley Forge, Pa.
Under IRS rules, income from trading bullion, in bars or coins, is taxed as a collectible (like art or antiques) at a marginal rate of 28%, but only when the profits are realized. That's a contrast to futures contracts for which profits on holdings are arbitrarily categorized into two buckets. Six-tenths of the profits get taxed at long-term capital gains rates, while the remainder receive short-term capital gains treatment. This happens at year-end regardless of whether the gains have been harvested, Flores explains.
But maybe Flores, the IRS and DB Commodities are the few that actually understand such nuances. In addition, many investors are attuned to accept that many fund managers don't really heed any attention to tax issues.
"For most people, I would characterize the poor tax management inherent to mutual funds as one of the 'costs' to be balanced against the managers'
supposed ability," says Ken Eades, professor of finance at the Darden business school in Charlottesville, Va.
Diminished negative roll and tax advantages aren't the only potential draws to the fund, explains Kevin Rich, CEO of DB Commodity Services and overseer of the bank's stable of commodity and currency ETFs. He says that DB Gold overcomes the problem of "bad assets."
Certain asset types, such as gold in bullion form, may not produce "good income" for mutual funds under IRS rulings, whereas profits from DB Gold should, because the ETF owns futures and cash, Rich says.
"Mutual funds are always struggling to deal with bad income," says Rich. "And gold is just one thing." The DB Gold product provides another tool for managers, he adds.
That may be so, but the gold fund and the other metals ETFs DB launched in January have a long way to go to catch up with streetTracks Gold Shares or even DB's nonmetal ETF cousins, such as the
PowerShares DB G10 Currency Harvest
, which has grown to $335 million since starting at $25 million in September.
Like the DB Gold, the
PowerShares DB Base Metals
PowerShares DB Silver
PowerShares DB Precious Metals
each held about the same level of assets at the end of March as they did at the beginning of the year, around $25 million.
Still, at least one industry watcher doesn't expect any near-term purging by DB.
"There are some big ETF providers that feel that in order to be there in the ETF world you need to put some stakes in the ground and let them grow at their own pace," says Tom Lydon, editor of
in Newport Beach, Calif.
And at current speeds, DB could have a very long wait ahead.