An “ETF” is an “exchange-traded fund”, which is essentially a fund that is designed to track the performance of an asset or basket of assets. For example, a gold ETF should be a fund that tracks the price of gold, a gasoline ETF should be a fund that tracks the price of gasoline, etc.
It’s similar in some ways to an index mutual fund, but trades the way a stock does. The price of an ETF constantly changes during the day as it is traded. For this reason, an ETF does not have its net asset value computed at the end of each trading day, the way a mutual fund does.
As is the case for index mutual funds, ETFs are made of arrays of stocks that track a specific index, such as the Standard & Poor’s 500 index. This means the value of the ETF rises and falls as the value of the index does. If the S&P 500 goes up by one percent, so does the value of the ETF tied to it. Although ETFs try to match the return on the indices tracked, that’s not always possible.
A difference of one percent or more between the index’s year-end return and that of a given ETF is often seen.
Defining Gold ETFs
A gold ETF is one type of commodity ETF. Commodity ETFs invest in and/or track the price of specific commodities.
Crude oil, gold, corn and sugar are all examples of commodities. Gold ETFs were one of the first commodity ETFs, dating to 2002. Investing in gold ETFs gives one the ability to profit from changes in the gold market without the liabilities and hassle of handling the gold itself. Investing in gold ETFs eliminates possessing, moving, reselling and insuring gold bullion.
Gold ETFs in the United States are traded on the American Stock Exchange. As with all ETFs, investing in a gold ETF means investing in a portfolio of companies and not in a single corporation. It’s possible to invest in amounts as little as a portion of an ounce at today’s gold prices. Gold ETFs have become popular since their inception. By November 2010 the second largest ETF, judged by market capitalization, was SPDR Gold Shares.
Explaining What Short ETFs are
Short ETFs are also known as bear or inverse ETFs.
Short ETFs are a vehicle for making money during market declines for whatever asset it’s based on. For example, a short gold ETF should be one that goes up when gold goes down. Short ETFs make money on the inverse of the index’s performance. ETFs make money through short selling, trading derivatives and using various leveraged investment techniques. As expected, short ETFs are popular in bear markets because their values rise during these periods. Short ETFs have advantages over short selling stocks. The latter has the potential to expose the investor to limitless losses, whereas short ETFs expose investors to the loss of the cost of buying the ETF only.
Short Gold ETFs
As the name implies, a short gold ETF is an inverse commodity ETF.
This type of ETF invests in an array of gold stocks and makes money during bear markets. With gold prices soaring in the recent past, some analysts think that a correction in the price of gold is due soon. Investing in a short gold ETF is a way to hedge bets against the continued increasing price of gold.
Of course, a short ETF is absurdly risky. During a bull market, it is rarely, rarely, rarely ever a good investment to even consider. For most reading this, you should stay away from these funds. I have never and will never utilize them. For my strategy, I just buy gold and sell gold — and that’s it.
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