Gold is crashing with prices dipping below $1,400 an ounce Monday. Inverse ETFs are capitalizing on gold’s misfortunes.
The ProShares UltraShort Gold (NYSEArca: GLL), which tries to reflect two times the inverse, or -200%, daily performance of gold bullion, surged 15.8% Monday as gold futures plunged 7.7% to $1,370 per ounce. The fund is up 24.3% year-to-date. [Gold ETFs Slump on Bearish Sentiment]
Meanwhile, the SPDR Gold Shares (NYSEArca: GLD) dropped 8.2% Monday. The ETF is down 11.2% year-to-date.
Inverse ETFs also use derivatives in an attempt to achieve a negative, or inverse, multiplier to the direction of the underlying asset or index, and they would typically rebalance on a daily basis. The ETF strategies help get in on tactical short-term opportunities. Additionally, these products are more suitable for those with a high risk tolerance.
Traders should also know that inverse and leveraged products are not suitable for long-term buy-and-hold investors as the compounding affects from the daily rebalances would create divergences from the ETF’s performance to that of the underlying index, especially over periods of high volatility. [Inverse and Leveraged Funds]
Gold bullion has declined over 10% year-to-date, and it is off 28% from its all-time high. Consequently, gold is currently deep in bear market territory, writes Adam Shell and Kim Hjelmgaard for USAToday.