Every exchange traded fund (ETF) has its own characteristic that makes it work the way it does, and it is important for investors to be aware of these inner workings. The recently introduced gold-hedge exchange traded note (ETN) may have its own unique theme, but it’s simple enough to understand.

The UBS E-TRACS S&P 500 Gold Hedged Index ETN (NYSEArca: SPGH), which has an expense ratio of 0.85%, is an ETN – unsecured, zero-coupon obligation – that tries to reflect the performance of the S&P 500 Composite and long positions in nearby COMEX gold futures, writes Hard Asset Investor for iStockAnalyst. Gold and stocks sometimes travel in unison, but historically, the correlation between the two asset classes is low or, in the case of the present markets, negative. [The ETN Industry Comeback.]

Still, an investor may just go with the “do-it-yourself” method, combining Standard & Poor’s Depository Receipts (NYSEArca: SPY) or the iShares S&P 500 Index ETF (NYSEArca: IVV) with SPDR Gold Shares Trust (NYSEArca: GLD). An equally weighted combination of the funds would cost around 0.25%, but what of the commissions for buying three funds? [The Case for Investing In Gold ETFs.]

There’s the rub. The do-it-yourself portfolio requires manual monthly rebalancing, which may result in higher potential tax liabilities and commissions. At each rebalancing, an investor will pay commission on selling outperformers and buying underachievers. Gains are likely to be counted as short-term, which will be taxed at ordinary income rates.

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