The golden target: analyzing the tracking performance of leveraged gold ETFs

The purpose of this study is to understand the tracking errors of leveraged exchange-traded funds (LETFs) on gold and demonstrate improved tracking performance by dynamic portfolios of gold futures.

The author formulates and solves a constrained quadratic minimization problem to construct static replicating portfolios of both leveraged and unleveraged benchmarks in gold; a dynamic constant leveraged portfolio using gold futures is used to track the path of the leveraged gold benchmark.

The results suggest that market-traded LETFs do not track a leveraged position in gold effectively over a long horizon, and the dynamic leveraged futures portfolio achieves lower tracking errors over multiple years.

The research informs us that investors should consider alternative portfolios with gold futures, rather than holding a leveraged gold exchange-traded funds to achieve a desired leveraged exposure in spot gold.

The main contribution of the study is the use of gold futures to dynamically replicate a gold benchmark with any given leverage ratio and the detailed comparison of the tracking performance of LETFs versus optimal static and dynamic futures portfolios.