HardAssetsInvestor

Written by Brad Zigler  |

March 11, 2008

Early Report: New Gold ETNs Upside Down

Details

Last month there was a lot of buzz surrounding the launch of a new suite of inverse and levered gold exchange-traded notes tracking the gold portion of the Deutsche Bank Liquid Commodity Index-Optimum Yield.

The portfolios - the DB Gold Double Long ETN (NYSEArca: DGP), the DB Gold Short ETN (NYSE Arca: DGZ) and the DB Gold Double Short ETN (NYSE Arca: DZZ) - are designed to yield +200%, -100% and -200% of the monthly return of the underlying index, respectively. DB's +100% exposure is offered through the PowerShares DB Gold Fund (AMEX: DGL), an exchange-traded fund.

Keep the "monthly" in mind when considering the returns for these instruments, because, after the first few trading days, results appear not only counterintuitive, downright upside down.

The "up" note is down and the "down" notes are up even as gold futures - the asset tracked by the underlying index - have moved higher.

Here's how the notes fared from their launch on February 28 through March 10:

	April Gold (GCJ)	Long Gold (DGL)	Double Long (DGP)	Short Gold (DGZ)	Double Short (DZZ)
Return	0.44%	-0.05%	-0.39%	0.37%	0.21%
Volatility	22.00%	23.89%	48.36%	28.15%	46.14%
Correlation (vs. GCJ)	1.00	0.98	0.99	-0.92	-0.97
Beta (vs. GCJ)	1.00	1.29	2.60	-1.62	-2.51

There are only eight trading days represented here, so this is infancy for the new notes. Still, that's 40% of a trading month. There'll be a LOT of ground for these notes to cover.

One thing is plainly evident, though: Beta is a more reliable metric than cumulative returns. DGP delivers twice the positive beta of DGL. DZZ gets close, yielding 1.5 times DGZ's negative beta correlation to gold futures.