Gold, Silver ETFs Reap the Benefits of the Futures Market

At a Glance

  • ProShares gold and silver ETFs have seen a significant tightening in bid/ask spreads since benchmarking to COMEX futures.
  • Trading activity since January has increased by $3 million per day

On January 7, ProShares  changed the benchmarks of its 2x leveraged and -2x inverse gold and silver ETFs (UGL, GLL, AGQ, ZSL) from LBMA auction prices to Bloomberg futures-based commodity subindexes. This marked the first time leveraged and inverse ETFs have been benchmarked to gold and silver futures prices.

Advantages of Futures Benchmarks

Leveraged and inverse commodity exchange-traded products (ETPs) typically use derivatives to obtain exposure, as opposed to transacting in physical commodities. Before switching to futures-based indexes, ProShares gold and silver ETFs obtained their exposure through forwards — negotiated OTC contracts between individual institutions. Historically, financing costs from forwards and trading fees for forward counterparties to participate in the London auctions have been significant. In leveraging the COMEX futures market to manage our funds, we have seen both lower costs and greater market transparency compared to using a forwards-based model.

Spreads Tell the Story

Perhaps the most impactful result of the switch so far, though, has been a significant tightening in bid/ask spreads. We attribute this to COMEX’s 24-hour trading through a clearing house, highly standardized futures contracts with deep liquidity, and strong marketplace integrity.

Stronger Trading Activity

Since the benchmark change on January 7, we’ve also seen increased trading activity―to the tune of $3 million. The average daily turnover of ProShares gold and silver ETFs from January 7 to March 31 was $9.6 million, versus $6.6 million for the same timeframe prior to the change.

 

What’s Next for Precious Metal Investing?

Safe-haven assets could move to the forefront of the investment landscape as the global economy navigates a challenging environment, making leveraged precious metals ETFs attractive for their cost-effectiveness. And if the year brings increased volatility to gold and silver prices, leveraged and inverse precious metals ETFs may become sought-after vehicles for active traders and hedgers.

 

 

Investing in these ETFs involves substantial risk of loss, including the possible loss of principal. Read more about ProShares geared precious metals ETFs and their risks. This information must be accompanied or preceded by a current ProShares Trust II prospectus. ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds’ advisor or sponsor.

Leks Gerlak has been an Investment Strategist with ProShares since 2015. His responsibilities include portfolio analysis, education, product research and development, and the presentation of investment strategies using the company’s leveraged and inverse (tactical) ETFs. This information is not meant to be investment advice.

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