“DGL has lagged the return of gold by more than 2% annualized since its 2007 inception, far in excess of its stated 0.75% expense ratio,” wrote Morningstar analyst Samuel Lee in a March profile of the ETF.

“Moreover, the gap was the result of consistent underperformance, suggesting the fund incurs predictable hidden costs,” he added. “The solution to the mystery may be DGL’s unconventional structure (for a gold fund, that is): Unlike physical bullion funds, DGL replicates gold’s returns by owning futures contracts, which must be ‘rolled over’ frequently, creating potentially large trading costs.”

In other words, DGL can suffer when gold futures are in contango, or the spot price is lower than the closest future contact. However, the ETF’s tracking index seeks to minimize the effects of negative roll yield. The benchmark replaces expiring futures contracts with new contracts expiring in the month that offer the best roll yield.

DGL tries to minimize the losses from rolling in a contangoed market, and tries to maximize the roll benefits in backwardated markets, according to the prospectus.

Therefore, the current backwardation in gold could provide a tailwind for the futures-based ETF. [Commodity ETFs and Contango]

Full disclosure: Tom Lydon’s clients own GLD.