The golden target: analyzing the tracking performance of leveraged gold ETFs. Issue 3 (3rd August 2015)

• Record Type: Journal Article
• Authors: Leung, Tim
• Is Part Of: Studies in economics and finance. Volume 32:Issue 3(2015)
• Page Start: 278
• Page End: 297
• Publication Date: 2015-08-03
• Subjects: Economics -- Periodicals; Finance -- Periodicals; 330
• DOI: 10.1108/SEF-01-2015-0009
• Languages: English
• ISSNs: 1086-7376

Abstract

<abstract> <title> <x content-type="archive" xml:space="preserve">Abstract</x> </title> <sec> <title content-type="abstract-heading">Purpose</title> <p> – The purpose of this study is to understand the tracking errors of leveraged exchange-traded funds (LETFs) on gold and demonstrate improved tracking performance by dynamic portfolios of gold futures. </p> </sec> <sec> <title content-type="abstract-heading">Design/methodology/approach</title> <p> – The author formulates and solves a constrained quadratic minimization problem to construct static replicating portfolios of both leveraged and unleveraged benchmarks in gold; a dynamic constant leveraged portfolio using gold futures is used to track the path of the leveraged gold benchmark. </p> </sec> <sec> <title content-type="abstract-heading">Findings</title> <p> – The results suggest that market-traded LETFs do not track a leveraged position in gold effectively over a long horizon, and the dynamic leveraged futures portfolio achieves lower tracking errors over multiple years. </p> </sec> <sec> <title content-type="abstract-heading">Research limitations/implications</title> <p> – The research informs us that investors should consider alternative portfolios with gold futures, rather than holding a leveraged gold exchange-traded funds to achieve a desired leveraged exposure in spot gold. </p> </sec> <sec> <title content-type="abstract-heading">Originality/value</title> <p> – The main contribution of the study is the use of gold futures to dynamically replicate a gold benchmark with any given leverage ratio and the detailed comparison of the tracking performance of LETFs versus optimal static and dynamic futures portfolios.</p> </sec> </abstract>