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

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  • Tim Leung
  • Brian Ward

Abstract

Purpose - – 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. Design/methodology/approach - – 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. Findings - – 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. Research limitations/implications - – 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. Originality/value - – 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.

Suggested Citation

  • Tim Leung & Brian Ward, 2015. "The golden target: analyzing the tracking performance of leveraged gold ETFs," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 32(3), pages 278-297, August.
    • Handle: RePEc:eme:sefpps:v:32:y:2015:i:3:p:278-297
    DOI: 10.1108/SEF-01-2015-0009
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    References listed on IDEAS

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    1. Dirk G. Baur & Brian M. Lucey, 2010. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Financial Review, Eastern Finance Association, vol. 45(2), pages 217-229, May.
    2. Alexander, C. & Barbosa, A., 2008. "Hedging index exchange traded funds," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 326-337, February.
    3. Smales, Lee A., 2015. "Asymmetric volatility response to news sentiment in gold futures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 161-172.
    4. Stoyu Ivanov, 2013. "The influence of ETFs on the price discovery of gold, silver and oil," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(3), pages 453-462, July.
    5. Baur, Dirk G. & McDermott, Thomas K., 2010. "Is gold a safe haven? International evidence," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1886-1898, August.
    6. Dipak Ghosh & Eric Levin & Robert E Wright & The Centre for Economic Policy Research, "undated". "Gold as an Inflation Hedge?," Working Papers Series 96/10, University of Stirling, Division of Economics.
    7. Casarin, Roberto & Chang, Chia-Lin & Jimenez-Martin, Juan-Angel & McAleer, Michael & Pérez-Amaral, Teodosio, 2013. "Risk management of risk under the Basel Accord: A Bayesian approach to forecasting Value-at-Risk of VIX futures," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 183-204.
    8. K. Triantafyllopoulos & G. Montana, 2011. "Dynamic modeling of mean-reverting spreads for statistical arbitrage," Computational Management Science, Springer, vol. 8(1), pages 23-49, April.
    9. Narat Charupat & Peter Miu, 2014. "A New Method to Measure the Performance of Leveraged Exchange-Traded Funds," The Financial Review, Eastern Finance Association, vol. 49(4), pages 735-763, November.
    10. Tim Leung & Ronnie Sircar, 2015. "Implied Volatility of Leveraged ETF Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(2), pages 162-188, April.
    11. Tim Leung & Xin Li, 2015. "Optimal Mean Reversion Trading With Transaction Costs And Stop-Loss Exit," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 1-31.
    12. Chia-Lin Chang & Juan-Ángel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2011. "Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures," Working Papers in Economics 11/12, University of Canterbury, Department of Economics and Finance.
    13. Kevin Guo & Tim Leung, 2016. "Understanding the Tracking Errors of Commodity Leveraged ETFs," Papers 1610.09404, arXiv.org.
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    Cited by:

    1. Tim Leung & Brian Ward, 2020. "Tracking VIX with VIX Futures: Portfolio Construction and Performance," World Scientific Book Chapters, in: John B Guerard & William T Ziemba (ed.), HANDBOOK OF APPLIED INVESTMENT RESEARCH, chapter 21, pages 557-596, World Scientific Publishing Co. Pte. Ltd..
    2. Gregor Dorfleitner & Anna Gerl & Johannes Gerer, 2018. "The pricing efficiency of exchange-traded commodities," Review of Managerial Science, Springer, vol. 12(1), pages 255-284, January.
    3. Tim Leung & Brian Ward, 2018. "Dynamic Index Tracking and Risk Exposure Control Using Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(2), pages 180-212, March.
    4. Xiaodong Chen & Tim Leung & Yang Zhou, 2022. "Constrained dynamic futures portfolios with stochastic basis," Annals of Finance, Springer, vol. 18(1), pages 1-33, March.
    5. Subhashis Nandy, 2016. "Empirical Observations on the Tracking Errors and the Risk-Adjusted Returns of REIT-Based Exchange Traded Funds," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(9), pages 1-63, August.
    6. Tim Leung & Raphael Yan, 2019. "A stochastic control approach to managed futures portfolios," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-22, March.
    7. Kevin Guo & Tim Leung & Brian Ward, 2019. "How to mine gold without digging," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-30, March.
    8. Tim Leung & Hyungbin Park, 2017. "LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(06), pages 1-33, September.
    9. Guo, Kevin & Leung, Tim, 2017. "Understanding the non-convergence of agricultural futures via stochastic storage costs and timing options," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 32-49.
    10. Bahman Angoshtari & Tim Leung, 2019. "Optimal dynamic basis trading," Annals of Finance, Springer, vol. 15(3), pages 307-335, September.
    11. Nian Yao, 2018. "Optimal leverage ratio estimate of various models for leveraged ETFs to exceed a target: Probability estimates of large deviations," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-37, June.

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