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

Tim Leung and Brian Ward

Studies in Economics and Finance, 2015, vol. 32, issue 3, 278-297

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.

Keywords: Exchange-traded funds; Gold; Tracking error (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (14)

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Working Paper: The Golden Target: Analyzing the Tracking Performance of Leveraged Gold ETFs (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:v:32:y:2015:i:3:p:278-297

DOI: 10.1108/SEF-01-2015-0009

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