DGL: PowerShares’ Gold Play

PowerShares Capital, together with Deutsche Bank, launched seven new sector ETFs early this month. Among the new offerings, one is PowerShares DB Gold Fund (DGL). According to the fund prospectus, DGL is based on the Deutsche Bank LiquidCommodity Index – Optimum Yield Gold, which has the following performance as of December 31, 2006:

In contrast to another popular gold ETF, streetTracks Gold Shares (GLD) which is directly connected to the physical metal held by the Trust and are valued based on the price of the gold bullion, DGL invests in gold future contract. Thus, the different investment objectives have different tax consequences. According to SeekingAlpha.com,

The bullion ETFs, such as the $8 billion streetTRACKS Gold Shares, are taxed as “collectibles” like other bullion holdings, with a long-term capital gains tax rate of 28 percent. Since the new ETFs rely on futures, however, any gains are taxed 60 percent as long-term gains and 40 percent as short-term gains, creating a maximum blended tax rate of 23 percent.

Currently, I am investing in a gold mutual fund, Tocquevill Gold (TGLDX), and quite happy with its performance so far. The only problem for precious metal mutual funds like TGLDX is their relatively high expenses ratio. Vangaurd Precious Metal fund (VGPMX), as always, has a rock-bottom ER of 0.40%, but you have to have $10,000 to get in, making it almost impossible for small investors.

Gold price has plateaued around $620 an ounce in recent months, but there are some predictions that it can go even higher. Has the easy money been made already? As trying to predict anything else, it's hard to predict what the gold price will be one year, two years, or five years from now, but the demands for gold jewelry are there. Following are some key numbers for some gold related investment choices.

Symbol Expense Price 1-yr return
GLD 0.40% $62.17 11.78%
IAU 0.40% $62.15 11.90%
DGL 0.50% $24.85 N/A
TGLDX 1.50% $48.54 19.68%

Both GLD and IAU (iShares Comex Gold Trust) belong to the bullion ETFs, thus they have almost identical price and return. For TGLDX, though its expense is the highest among the four choices, its significant perform advantage offsets some losses from fees. Also for mutual fund investing, there's no buy and sell commissions, but for EFTs, you do have to pay various amount of transaction fees to your brokerage firm. TGLDX has a moderate $1,000 initial investment requirement.

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4 Responses to “DGL: PowerShares’ Gold Play”

  1. moneymonk |  Jan 17, 2007 at 4:25 pm

    Good information Sun, I did not know about those new ETFs with PowerShares Capital.

    I see you always have your eyes open to ETF news.