An Empirical Investigation of the Performance of Commodity-Based Leveraged ETFs

Rob,; Wright, Colbrin

doi:10.2139/ssrn.1668614

“…For equity ETFs, Rompotis (2011) applies regression to determine the tracking errors between ETFs and their stated benchmarks, and finds persistence in tracking errors over time. The horizon effect is also illustrated in the empirical study by Murphy and Wright (2010) for commodity LETFs. Guo and Leung (2014) systematically study the tracking errors of a large collection of commodity LETFs.…”

mentioning

confidence: 78%

The Golden Target: Analyzing the Tracking Performance of Leveraged Gold ETFs

Leung

¹

,

Ward

²

2015

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This paper studies the empirical tracking performance of leveraged ETFs on gold, and their price relationships with gold spot and futures. For tracking the gold spot, we find that our optimized portfolios with short-term gold futures are highly effective in replicating prices. The market-traded gold ETF (GLD) also exhibits a similar tracking performance. However, we show that leveraged gold ETFs tend to underperform their corresponding leveraged benchmark. Moreover, the underperformance worsens over a longer holding period. In contrast, we illustrate that a dynamic portfolio of gold futures tracks significantly better than various static portfolios. The dynamic portfolio also consistently outperforms the respective market-traded LETFs for different leverage ratios over multiple years.

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“…For equity ETFs, Rompotis (2011) applies regression to determine the tracking errors between ETFs and their stated benchmarks, and finds persistence in tracking errors over time. The horizon effect is also illustrated in the empirical study by Murphy and Wright (2010) for commodity LETFs. Guo and Leung (2014) systematically study the tracking errors of a large collection of commodity LETFs.…”

mentioning

confidence: 78%

The golden target: analyzing the tracking performance of leveraged gold ETFs

Leung

¹

,

Ward

²

2015

Studies in Economics and Finance

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This paper studies the empirical tracking performance of leveraged ETFs on gold, and their price relationships with gold spot and futures. For tracking the gold spot, we find that our optimized portfolios with short-term gold futures are highly effective in replicating prices. The market-traded gold ETF (GLD) also exhibits a similar tracking performance. However, we show that leveraged gold ETFs tend to underperform their corresponding leveraged benchmark. Moreover, the underperformance worsens over a longer holding period. In contrast, we illustrate that a dynamic portfolio of gold futures tracks significantly better than various static portfolios. The dynamic portfolio also consistently outperforms the respective market-traded LETFs for different leverage ratios over multiple years.

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“…We develop a method to dynamically replicate gold miner's equity returns using a tradable, dynamic tracking portfolio. Some existing studies have focused on analyzing the price behaviors of the gold (L)ETFs rather than the gold miner stock and the firm's production model (Murphy and Wright, 2010;Guo and Leung, 2015). While common factors for equities in the asset pricing literature are the market portfolio, size, profitability, and value (Fama and French, 1993), Johnson and Lamdin (2015) and Bloseand and Shieh (1995) have documented the poor performance of static multi-factor models in the gold miner equity space.…”

Section: Related Studiesmentioning

confidence: 99%

How to mine gold without digging

Guo

¹

,

Leung

²

,

Ward

³

2019

J. Finan. Eng.

0

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This paper examines the main drivers of the returns of gold miner stocks and ETFs during 2006–2017. We solve a combined optimal control and stopping problem to demonstrate that gold miner equities behave like real options on gold. Inspired by our proposed model, we construct a method to dynamically replicate gold miner stocks using two factors: the spot gold ETF and market equity portfolio. Furthermore, through each firm’s factor loadings on the replicating portfolio, we dynamically infer the firm’s implied leverage parameters of our model using the Kalman Filter. We find that our approach can explain a significant portion of the drivers of firm implied gold leverage. We posit that gold miner companies hold additional real options which help mitigate firm downside volatility, but these real options contribute to lower returns relative to the replicating portfolio when gold returns are positive.

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An Empirical Investigation of the Performance of Commodity-Based Leveraged ETFs

Cited by 7 publications

References 0 publications

The Golden Target: Analyzing the Tracking Performance of Leveraged Gold ETFs

The Golden Target: Analyzing the Tracking Performance of Leveraged Gold ETFs

The golden target: analyzing the tracking performance of leveraged gold ETFs

How to mine gold without digging

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