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

TL;DR

This paper evaluates the tracking performance of leveraged gold ETFs and proposes dynamic gold futures portfolios that outperform static strategies and market ETFs over time.

Contribution

It introduces a dynamic gold futures portfolio approach that improves tracking accuracy and outperforms traditional leveraged ETFs.

Findings

Optimized short-term gold futures portfolios effectively replicate gold prices.

Leveraged gold ETFs tend to underperform their benchmarks, especially over longer periods.

Dynamic portfolios outperform static strategies and market ETFs across multiple years.

Abstract

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.