Hey. So with UGLD out the door I've been looking for a new leveraged gold ETF and found DGP. Looking at charts it was pretty close to 2x of GLD. So, why did it fly so high the last week? What is going on? Reading the profile of trading gold futures with an interest in minimizing contango should basically just get you to gold with a low interest rate between contracts. What am I missing? Thanks.
I'm wondering if it could have been because UGLD is no longer traded as of July 2nd and everyone piled into DGP, but that would so extremely inefficient. That would lead a short UGLD and long gold futures trade to produce free money in time.
Take a look at how all the double ETNs/ETFs work. They return double the daily return of the underlying. Over the course of any term longer than a day, they almost certainly will not produce double the return of the underlying, when they do it's pure coincidence in how the daily moves worked out. It's easiest to make up an excel spreadsheet with a fake sequence of underlying moves with nice round numbers (up 10%, down 10%, down 10%, up 10%) and plot the move of the underlying vs the 2X fund calculating the daily return to be 2X the underlying's daily return to see how this effect works. This is undoubtedly what you're seeing here. If it had been a case of demand for DGP driving it's price up beyond what the underlying is doing, then you would see a major divergence in NAV vs price. If you're not seeing that, then you know that's not what's happening. BTW, love the oxymoron of your nick
When the UGLD ended I went to UGL (from Proshares) which is a lot more liquid than DGP. I also use AGQ in place of USLV. DGP doesn't seem to make sense -- it is down 9% and gold futures are a little higher?
Read the above, perhaps. Did you model the daily return feature and it still doesn't make sense, or do I need to further explain the model?
I understand what you wrote. I've been using these 2x & 3x ETFs for awhile. The less volatile the underlying index the more these ETFs do okay but yes they never return exactly 200% or 300% since as you say they are rebalanced daily. I think I read an article somewhere that stated for the S&P 500 the ideal leverage was 1.8X. I think it ultimately depends on the underlying index volatility. I also own the NUGT & JNUG 2X ETFs and during the March collapse they were changed from 3X to 2X since they almost went to zero. I think the JNUG underlying index was down almost 32% one day so it almost went to zero.
Thank you both. Yah, it must just be inefficiencies from having a radical imbalance of supply and demand in the short term. It went up 11% yesterday and closed down 14% today, just crazy. It would have been an incredible arbitrage yesterday to short it and buy the underlying, but I just didn't believe such inefficiencies could still exist in the market in 2020 so I just got out at yesterday's close. I'd definitely think that hedge funds and arbitrage guys would have jumped on it the last few trading days. Perhaps it is just too low volume. Very interesting....thank you both.