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Gold ETFs Shine on Brexit Woes

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Time and again, gold has been a safe harbor when uncertainties loom. The weakness in the global financial markets had helped gold to recover its sheen in 2016. A tumultuous global economy including pressing growth issues and the global oil market turbulence lifted its safe-haven demand (read: Gold ETF Investing: 10 Facts Investors Need to Know).

On top of it, U.K. surprised the world by voting in favor of leaving the EU, albeit the votes showed a narrow margin between the “leave” and the “stay” camps. This has made it the biggest strategic decision in decades. Polls had shown a neck-and-neck race between Brexit and Bremain in the run-up to the referendum, but the Brexit win took everyone by surprise (read: Brexit Shocker Forces These European ETFs Over 10% Lower).

There is no historic precedent to Brexit. As things stand now, it will certainly result in added volatility in the global market, which has already been reeling under pressure. In fact, the Federal Reserve Chair Janet Yellen sees it as having "significant economic repercussions."

Brexit has led to a surge in demand for the yellow metal as investors rushed to safe-haven assets. The gold bullion ETF SPDR Gold Shares GLD has added over 24.2% so far this year (as of June 24, 2016). On June 24, after the referendum results were announced, the fund surged4.9%, reacting to the Britain-EU split.

Meanwhile, we note that the jump in gold prices this year was also supported by plunging interest rates on a global scale. Earlier this month, 10-year note yields dropped to the lowest level in the last three years. Meanwhile, government bond yields in Japan, Germany and the U.K. also touched record lows. With the Fed not expected to raise interest rates in the near term and volatility apprehended to rule the markets in the coming days, gold’s rally is most likely to continue (read: Gold ETFs to Continue Their Bull Run: Here's Why?).

How to Play?

Given the flight to safety and intense buying pressure on gold, investors have a long list of options in the ETF world to tap the metal’s rally.

SPDR Gold Trust ETF:  This is the largest and most popular ETF in the gold space with AUM of $38.7 billion and average daily volume of around 11.2 million shares. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank. Expense ratio comes in at 0.40% (read: Britain Exits EU: Are Gold ETFs the Safest Haven Now?).

iShares Gold Trust (IAU - Free Report) : This ETF offers exposure to the day-to-day movement of the price of gold bullion and is backed by physical gold under the custody of JP Morgan Chase Bank in London. It has AUM of $8.2 billion and trades in solid volume of more than 7.9 million shares a day on average. The ETF charges 25 bps in annual fees.

ETFS Physical Swiss Gold Shares SGOL: This product also tracks the price of gold bullion and is backed by physical bullion under the custody of JPMorgan Chase Bank. It has amassed $1.0 billion in its asset base and trades in lower volume of 41,000 shares per day. The product has an expense ratio of 0.39%.

Some Leveraged ETFs

Let’s look at certain leveraged ETFs to create a leveraged long/short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short span of time provided the trend remains a friend. However, these funds run the risk of huge losses compared to traditional funds in fluctuating or erratic markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months). Despite this drawback, investors are seen to jump into these products for quick turns (see: all Leveraged Equity ETFs here).

ProShares Ultra Gold ETF UGL:  This fund seeks to deliver twice (2x or 200%) the return of the daily performance of gold bullion in U.S. dollars. It charges 95 bps in fees a year and has amassed $92.3 million in its asset base. Volume is light at about 48,000 shares per day.

VelocityShares 3x Long Gold ETN UGLD: This product provides three times (3x or 300%) exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has been able to manage an asset base of $81.2 million while charging a higher fee of 1.35% annually. The note trades in a volume of over 688,000 shares a day.

Daily Gold Miners Bull 3x shares NUGT: NUGT seeks to deliver thrice the daily performance of the NYSE Arca Gold Miners Index, which consists of firms that operate globally in both developed and emerging markets, and are involved primarily in the exploration and production of gold. It is rich in AUM of $1.4 billion and sees solid average trading volume of 8.5 million shares. Expense ratio comes in at 0.94%.

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