Playing Precious Metals Through Equity ETFs

by on September 21, 2010 | ETFs Mentioned:

Perhaps no corner of the ETF market has exploded as rapidly as the precious metals space, as the democratization of an asset class previously off limits to many investors has resulted in billions of dollars in cash inflows. The SPDR Gold Trust (GLD) is now the second-largest ETF by total assets, with more than $53 billion under management. Two other physically-backed gold ETFs (IAU and SGOL) have aggregate assets of nearly $5 billion, while a couple of silver funds (SLV and SIVR) hold another $6 billion. Even the relatively young platinum ETF (PPLT, $485 million) and palladium ETF (PALL, $393 million) have been huge hits with investors. In aggregate these seven physically-backed precious metals ETFs represent about 8% of total ETF assets, a remarkable statistic highlighting the amount of interest in this asset class.

Precious metals represent the only corner of the commodity market where exposure to spot prices is readily achievable and reasonably cost-efficient. Given the high value-to-weight ration of gold, platinum, and palladium (and to a lesser extent silver), it is possible for investors to maintain exposure to the spot price of the commodity. For most other commodities, physical storage isn’t practical–either for logistical or cost reasons. But the ability to achieve physical exposure is only one of the attractions of physically-backed ETFs. Because precious metals–particularly gold–are viewed as safe haven investments, they tend to perform very well during tumultuous economic environments. That makes them attractive as either an equity market hedge or a straight bet on volatility [see Hedge Funds Are Buying Up Gold ETFs, Should You?].

But some investors are understandably hesitant to invest in physically-backed precious metals ETFs. The underlying assets of these funds are bars of the relevant metal–assets that will never make a distribution or interest rate payment. The absence of any cash flows makes valuation a tricky task, and can make some investors uncomfortable. Whereas the value of a stock or bond can be estimated with relative precision, precious metal prices are subject investor whims and the sentiment of the market. Ultimately, the valuation of gold and other precious metals isn’t tied to any fundamental factors, and as such can be vulnerable to significant price movements over relatively short periods of time.

Precious Metals Exposure…Through Stocks

For investors looking to establish exposure to precious metals but a bit uneasy over the idea of investing in a rock pulled from the ground, there are a handful of ETFs that offer a unique type of exposure. Several funds in the Commodity Producers Equities ETFdb Category seek to replicate indexes consisting of companies that engage in the exploration and mining of precious metals. Like most companies, the profitability of these firms depends on the prevailing market price for their products–in this case precious metals. As such, their outlook tends to move in unison with the spot price of the related precious metal. But unlike GLD and others, the underlying assets of these funds generate cash flows and can be expected to generate a positive return over the long term [also read Mining ETFs: Eight Ways To Play].

Below, we profile five different ETFs offering an opportunity to invest in precious metals through equities [for more ETF ideas, sign up for our free ETF newsletter]:

  • Market Vectors Gold Miners ETF (GDX): This popular fund is linked to the NYSE Arca Gold Miners Index, a benchmark that consists of global companies engaged primarily in the mining for gold. GDX often trades as a leveraged play on gold, moving in the same direction as bullion but in greater magnitude.
  • Market Vectors Junior Gold Miners ETF (GDXJ): This fund can be thought of as a more volatile cousin of GDX; the Junior Gold Miners ETF invests in smaller companies with less established operations. The underlying index consists of companies that generate at least 50% of revenues from gold and/or silver mining, or hold real property that has the potential to produce revenue from gold and/or silver mining.
  • Global X Silver Miners ETF (SIL): This fund offers a way for investors to establish “indirect” exposure to silver prices by investing in companies whose operations focus around extracting the metal. Similar to GDX, this ETF will often trade as a leveraged play on spot silver prices. Since its inception only a few months ago, SIL has proven to be a hit with investors, racking up nearly $100 million in assets.
  • First Trust ISE Global Platinum Index Fund (PLTM): This ETF offers a way to play a precious metal that may not be as popular as an investment vehicle, but is a critical part of many industrial applications. PLTM tracks the ISE Global Platinum Index, a benchmark consisting of companies active in mining of platinum group metals (PGMs).
  • Powershares Global Gold and Precious Metals Portfolio (PSAU): This fund is more broad-based in nature, seeking to replicate an index that measures the performance of global companies involved in gold and other precious metals mining-related activities. While many of PSAU’s largest holdings are gold miners, this fund also include pure plays on platinum and silver.
  • Emerging Markets Metals & Mining Index Fund (EMT): In addition to precious metals miners, this ETF also maintains exposure to companies engaged in extracting industrial metals. As the name suggests, EMT focuses exclusively on stocks listed on exchanges in emerging markets; the top country weights include Brazil, South Africa, China, and Russia [try the new ETF Country Exposure Tool].

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Disclosure: No positions at time of writing.