Time For An Inverse Gold ETF?

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June 19, 2007 | ETFs | Author Asif

A reader recently asked me if I was aware of an ETF or fund that was the inverse of Gold. Inverse ETFs such as the ProShares Short Dow 30 (DOG) that I mentioned in a blog post titled One DOG Of An ETF, allow investors to short an index such as the Dow Jones, a sector such as real estate or a specific category of stocks such as small-cap growth. You can check out the entire list of ProShares short and ultrashort (twice the bang due to the use of leverage) ETFs here.

So why would someone want an inverse ETF such as DOG when you could just as easily short traditional ETFs? These ETFs allow investors to take a bearish or short position in retirement accounts such as IRAs or Roth IRAs that do not allow short selling. These ETFs can also be used in brokerage accounts that are not approved for margin. In the case of the ultrashort ETFs, they allow investors to use more leverage than the 50% margin possible in retail brokerage accounts, maginfying both the risk and the reward.

With this short explanation out of the way, I can now get back to the question at hand. While I am not aware of an ETF or fund that is the inverse of Gold, there may be a couple of indirect ways to achieve some of the effects of an inverse Gold ETF. One could invest in an asset class that is uncorrelated to Gold, such as stocks, which have traditionally gone up when Gold goes down. Unfortunately these traditional relationships between asset classes seem out of sync over the last few years and it is quite possible to see the price of stocks and commodities go up or down at the same time.

As you can see from this Merrill Lynch research report (pdf) by Richard Bernstein  and Kari Pinkernell, the 5 year correlation of the S&P 500 and gold went from a negative 24% in early 2000 to a positive 8% by 2007. The global economy we live in has created a global market where all boats appear to rise together or sink together, providing precious little protection in case of a downturn unless you happen to be in cash or bonds.

The other indirect alternative to an inverse gold ETF would be to invest in the ProShares Ultra Short Basic Materials (SMN) ETF that is based on the Dow Jones Basic Materials Index. As you can see from the components of this index (excel), it has at least four gold mining companies and some of the other components may be correlated to the price of gold. I am personally long Gold but with central banks dumping gold and keeping a lid on prices, the benefits of an inverse Gold ETF are evident and I would not be surprised if one is already in the pipeline awaiting approval. If not, I certainly hope one of the major ETF providers PowerShares (a unit of Invesco) (IVZ), WisdomTree (WSDT.PK), State Street (STT) or Barclays (BCS) is listening.


It Has Been Over A Year Since …

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December 26, 2006 | ETFs | Author Asif

… I Gave In To Temptation and bought my first ETF (Exchange Traded Fund) to add diversity to my all-stock portfolio. The PowerShares Value Line Timeliness Select Portfolio (PIV) was introduced last December and is based on the Value Line investment newsletter, one of the best performing investment newsletters over a 25 year period according to the Hulbert Financial Digest. The Value Line Investment Survey was also part of the “2007 Honor Roll” in the latest edition of the Hulbert Financial Digest, an honor reserved only for those newsletters that do well in up and down markets.

Given this excellent long-term track record, how did this ETF perform in 2006? It turned out to be a dog returning a meager 4.65% since the start of 2006 and underperforming the S&P 500 by a wide margin. For folks like me who bought this ETF shortly after its release last December, returns were even lower but thankfully still in positive territory. In contrast, stocks like Pfizer (PFE), Tata Motors (TTM) and VA Software (LNUX) that I picked up around the same time for my personal portfolio and the SINLetter model portfolio have posted impressive gains of 23.37%, 58.86% and 173.46% respectively.

So is it time to jump ship and abandon this ETF after these lackluster returns? One of the reasons many investors often tend to under perform the very mutual funds that they invest in or the investment newsletters that they follow is because they tend to abandon the fund or newsletter at the first sign of underperformance. This tendency to switch frequently between funds or newsletters can do some serious damage to the long-term returns of a portfolio. Apart from Value Line’s long-term track record, I also picked up the PowerShares Value Line Timeliness Select Portfolio (PIV) ETF to reduce the risk of my overall portfolio. Given my bleak outlook for 2007, Value Line’s tendency to do well in down markets makes it an ideal choice.

I plan to stick with this ETF through 2007 unless I need the capital to invest in the Chile Fund (CH), a closed-end fund that as the name suggests, invests in Chile. After trading at a premium for much of 2006, the fund is finally trading at a discount of -3.22% to Net Asset Value (NAV) and is beginning to look attractive as a play on a country with the highest nominal GDP per capita in Latin America.



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December 12, 2006 | ETFs | Author Asif

The number of new Exchange Traded Funds or ETFs reaching the market has been steadily increasing in recent months, leading some people, including Jim Cramer, to remark that there are too many ETFs these days. There are close to 8,000 mutual funds in the United States and the worldwide figure exceeds 55,000. Once you compare this against the paltry 200 ETFs on the market, it makes you wonder why anyone would think there are too many ETFs.

I agree that some of these new ETFs track “hot” sectors or have a very narrow definition, but I certainly welcome the opportunity to buy gold or silver through the streetTRACKS Gold (GLD) ETF or the iShares Silver Trust (SLV)  ETF instead of having to buy the physical asset or a mining company. But I digress.

I started writing this column to mention a few new ETFs that have just entered the market and the rather amusing ticker symbol that one of them trades under. You guessed it right. It is DOG and it is the ticker symbol for a new ETF called Short Dow30 ProShares that started trading on June 21, 2006. This ETF allows you to short the entire Dow Jones Industrial Average and you would be up 2% if the Dow Jones were to go down 2%. The three other siblings of DOG that will allow you to short the Nasdaq, the S&P500 and the S&P MidCap 400 Index  are listed below,

  • Short QQQ ProShares Inverse of the Nasdaq -100 Index (PSQ)
  • Short S&P500 ProShares Inverse of the S&P500 Index (SH)
  • Short MidCap400 ProShares Inverse of the S&P MidCap 400 Index (MYY)

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Time For A Dog ETF?

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August 16, 2006 | ETFs | Author Asif

No, I am not referring to the recently launched exchange traded fund that has the ticker symbol DOG and allows you to short the Dow Jones Industrial Average. I am talking about an ETF based on the Dogs of the Dow theory that was popular in the early 1990s and lost credibility during the roaring bull market of the late 1990s.

The Dogs have performed extremely well this year with a gain of 14.8% as of August 15th when compared to 4.8% for the Dow and 3% for the S&P 500. Once we include dividends, the gains from the Dogs of the Dow theory jump to 17.4%. (taking into account that GM slashed its dividend in half early this year). Some high dividend yielding ETFs such as the iShares Dow Jones Select Dividend Index (DVY) and the PowerShares HighYield Dividend Achievers (PEY) already exist and may appear to be similar to the Dogs of the Dow. However their returns tell a different story. DVY is showing gains of 7.9% YTD while PEY has posted gains of only 4%.

So is it time for another high dividend yielding ETF based on the Dogs of the Dow theory? Probably not, as the theory is very simple to follow and investors could just as easily buy the 10 stocks individually. However if an index were to be created that included the Dogs of the Dow, the Dogs of the S&P 500 and another variation of the theory that uses share buybacks, we might have a very interesting index indeed.

This post was originally published on and is republished here with permission.

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I Gave In to Temptation…

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December 12, 2005 | ETFs | Author Asif

…and decided to buy my first ETF (Exchange Traded Fund) after reading about the release of a new ETF called the PowerShares Value Line Timeliness Select Portfolio (PIV) in this article by Mark Hulbert (a columnist).

This sudden leap from individual stocks to an ETF was driven by the fact that I have always had great respect for the Value Line Timeliness Ranking System and found this ETF to be a perfect opportunity to follow the Value Line Ranking System with the lowest time and cost overheads. Check out their investment prospectus if you find this ETF interesting.