Long Gold/Short Euro Working Beautifully

Back in February, AdvisorShares launched the AdvisorShares Gartman Gold/Euro ETF (GEUR | D-33).  The ETF was a one-stop implementation of something noted market caller (and ETF.com Think Tank contributor) Dennis Gartman has been saying for years: Get long gold, but in euro terms. 

Since the fund launched, gold (quoted in dollars) is down 6.6 percent.  The euro, versus the dollar, is down 12.3 percent. GEUR, which shorts the euro while going long gold, is up 6.9 percent—actually 40 basis points behind a theoretically perfect expression of this long gold/short euro concept:

There are a few caveats here, however. 

For investors used to looking at currencies and gold as “spot” vehicles, it’s critically important to understand GEUR’s unique structure.  It’s structured as a regular 1940 Act mutual fund, like common equity and bond ETFs.

That’s good news in the sense that it will send a 1099 form to investors.  But what it actually invests in isn’t gold and euros—it’s a Cayman Island company.  That Cayman Island company, in turn, enters into futures contracts to get long-gold and short-euro exposure.

There are two ramifications here.  First, because GEUR ultimately ends up in the futures markets, it will suffer from any contango in the gold futures market, and benefit from any contango in the euro futures market (because it’s short the euro).

Fortunately, both are traditionally very flat, so this contango issue is largely irrelevant compared with the contango we see in traditional commodity futures.

The second is how GEUR actually recognizes gains.  Because it’s in short-term futures contracts, every month it has to actually book the gains (or losses) from its positions as it rolls into new contracts.

Those gains will be a combination of ordinary income as well as long-term and short-term capital gains.  And in fact, in December, GEUR made a reasonably substantial distribution of 77 cents per share (on a share price of $12.41), about half of which was classified as long-term capital gains.

There’s nothing either surprising or concerning here. Traditional bullion-based ETFs like the SPDR Gold Shares (GLD | A-100) don’t make distributions as a rule, but when you sell them, you pay 28 percent on your gain, regardless of your holding period.

Futures-based funds generally have to report gains as split between 60 percent long term (20 percent maximum tax rate) and 40 percent short term (as high as 39.6 percent tax rate).  When you blend those two together, you end up with 27.84 percent—a smidge better, but basically the same.  The big difference is that you’re going to have to recognize those gains every year, instead of holding on to them.

The biggest issue may just be one of expectation.  If you were unfortunate enough to be looking at a price chart for GEUR, instead of a total return chart, you might think it had come off the rails in the past few weeks:

In fact, all that happened was GEUR had to distribute its winnings and reset the playing field for the next year.  Note: GEUR, while doing its job, is pricey—0.65 percent, or $65 for each $10,000 invested—and can be tough to trade, so be careful if you’re a believer looking to follow Gartman into 2015.

At the time this article was written, the author held no position in the securities mentioned.  You can reach Dave Nadig at [email protected] or on Twitter @DaveNadig.