Precious Metal ETFs: Beyond Gold

Published on by on August 18, 2011 | Updated July 18, 2012

While gold is certainly the most popular, some investors may wish to achieve more broad-based exposure to precious metals. Few corners of the exchange-traded product world have seen more explosive growth in recent years than precious metals, as investors have embraced these vehicles as an incredibly efficient way to access assets that have turned in some monster performance results in recent years.

Complementing your existing gold holdings with exposure to precious metals like silver, platinum, or palladium is an appealing strategy that may improve risk-adjusted returns over the long haul. Precious metals beyond gold offer a source of potentially uncorrelated returns since the market price for these resources in influenced by different price drivers. Spreading out exposure across multiple metals can serve to reduce commodity-specific risk, and in turn smooth out overall portfolio volatility. 

While gold prices are largely driven by “safe haven” demand and minimal industrial use, silver serves as a key metal in the electronics industry, and it too can take on “safe haven” appeal during times of panic in the market. Silver prices tend to be quite more volatile than gold however, which may turn away some risk-averse investors and lure more aggressive ones [see chart below]. Platinum and palladium are also vital resources for the electronics industry, as well as dentistry, medicine, automobile industry, and numerous other chemical applications.

For those looking to achieve more balanced exposure to precious metals, there are a handful of ETPs that include multiple metals within one ticker. And while there are some general similarities among these products–all include exposure to gold and silver–there are a number of differences as well that can have a significant impact on the risk/return profile. Below we briefly profile some of the more popular products in the Precious Metals ETFdb Category:

  • PowerShares DB Precious Metals Fund (DBP): This is a futures-based fund that is comprised of gold and silver contracts (gold has a base weight of 80% in the underlying index). The use of futures contracts means that DBP won’t necessarily correspond perfectly to the changes in the spot prices of these precious metals; the slope of the futures market and the interest earned on any uninvested cash will also contribute to bottom line returns. It’s also worth nothing that DPS’s underlying index utilizes a proprietary “Optimum Yield” methodology that is designed to minimize the negative impact of rolling exposure in a contangoed market and maximize any positive effect in a backwardated market.
  • ETFS Physical Precious Metal Basket Shares (GLTR): As the name suggests, this ETF is physically-backed and its underlying bullion holdings include gold, silver, platinum, and palladium. This ETF avoids the many nuances associated with futures-based products and allows for more accurate tracking of spot prices. Exposure is tilted towards gold and silver overall, gold accounts for just under half, with silver making up about 40% of the portfolio. Platinum and palladium together account for just over 10% of underlying holdings.
  • iPath Dow Jones UBS Precious Metals ETN (JJP): Similar to DBP, this product is also linked to an index comprised of gold and silver futures contracts.  JJP however is heavier on silver (which accounts for about 27% of the underlying portfolio) and is also structured as an exchange-traded note (ETN). As such, JJP is a senior, unsubordinated, unsecured debt security that is linked to the performance of an index. Investors are in turn exposed to the credit risk of the issuing institution (Barclays), but this product will avoid potential tracking error that some ETFs may experience as a result of the roll process.
  • iPath Pure Beta Precious Metals ETN (BLNG): This is a fairly new ETN on the market which is similar to JJP in many ways. The main difference is that BLNG’s underlying index (80% gold, 20% silver) won’t roll its holdings on predetermined dates, instead basing roll decisions on observable price signals. The Pure Beta methodology is designed to mitigate the impact of contango and backwardation on bottom line returns.
  • ETFS White Metals Basket Trust (WITE): This physically-backed ETF is a one of a kind product which offers exposure to silver (62%), platinum (28%), and palladium (10%). Investors can use WITE to complement existing gold exposure or to entirely diversify away from the yellow metal. Much like the other ETF Securities products, WITE’s holdings will also be inspected biannually by an independent metal assayer while the bar numbers held by the trust will be published on a daily basis, giving investors greater peace of mind regarding their holdings.

<<<<<Previous: Leveraged/Inverse Gold ETFs…..Precious Metal ETFs: Beyond Gold…..Next: Analyst Takes>>>>>