Out of the 26 funds that Momentum Tracker added to its fund universe at the beginning of 2008, commodity based funds showed some of the most promise. At the end of January, DGL gained the No. 2 spot, a position that it held for almost a month, before sliding as low as No. 21 last week. “There are three main types of gold ETFs in the market today: physical gold, gold mining and gold futures contracts” says Rillon, “DGL falls into the last of these three categories.”
DGL tracks the Deutsche Bank Liquid Commodity Index–Optimum Yield Gold Excess Return™ (Index). Performance in the ETF is designed to mirror the performance of the index, which is composed of COMEX gold futures and three-year treasuries. Rillon believes that if the dollar begins to slide again, “DGL could experience significant returns for investors who understand and embrace its complexities.”
While derivatives, such as futures, are not appropriate for every portfolio, trading them will certainly give you the most leverage when dealing with the gold market. While you will not own physical gold with DGL, your returns will still correlate with the price of gold bullion, rather than the press releases of gold companies.
Despite the heightened interest in futures markets in the last year, futures remain a risky investment. Perhaps the most talked of snag in commodities funds is contango: as the futures contracts that you own expire, the new ones that you are “rolled into” can cost marginally more. This process can slowly eat away at your underlying capital and create an undertow on your returns.