From the September 2013 issue of Futures Magazine • Subscribe!

Leveraging futures vs. ETN differentials

The relatively smooth price trends for gold, silver and copper futures that were in place when 2013 began were interrupted by rough waters in mid-February. As you can see in “Futures price changes” (below), values fell abruptly in the middle of April. The metals showed signs of modest recovery by the end of the month, but that process has been slow to develop.

Metals exchange-traded notes (ETN) followed much the same course as the futures contracts through the first four months of 2013. “Metals ETNs veer from futures” (below) shows that although the overall patterns of price changes are similar, there are significant differences between the ETN and futures markets.

For example, the cumulative percentage price change for the silver ETN (USLV) fell to negative 95% on April 16 as opposed to the cumulative change of –30% for May 2013 silver futures. This difference is not surprising for an ETN that has the objective of providing three times the daily performance of the S&P GSCI silver index, plus a daily accrual of three-month U.S. Treasury rates (less the daily investor fee). In other words, leverage may be sought for price gains or losses, and it is obvious that the leverage is working as intended.

The gold ETN (UGOLD) also is leveraged, and has the goal of producing three times the S&P GSCI gold index. At the end of trading on April 16, 2013, the cumulative percentage price change for June 2013 gold futures was down by 19% compared to –68% for the gold ETN, again demonstrating the power of leverage. 

Copper futures and the contract’s comparable ETN do not show the same results as gold and silver. The operative copper ETN is iPath DJ-UBS Copper TR Sub-Idx. The note has the objective of reflecting the performance of copper futures contracts traded on the CME’s Comex and is not leveraged. While the May 2013 copper futures fell to a –14.30% cumulative change on April 16, the copper ETN had declined by 14.96%. 

For a trader interested in gaining from leverage and willing to accept the risk, silver futures and silver ETNs are prime alternatives.

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