Precious Metals ETFs: Finding The Best Fit

by on June 15, 2011

ETFs have emerged as popular tools for establishing exposure to a wide variety of asset classes, ranging from U.S. Treasuries to Vietnamese equities. But 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 the most efficient way to access assets that have turned in some monster performance numbers in recent years. The 21 ETFs in the Precious Metals ETFdb Category have more than $83 billion in aggregate assets, representing about 8% of the total ETP industry. That’s a massive total for an asset class that generally accounts for a relatively minor portion of long-term portfolios, reflecting the appeal of the low maintenance and low fees offered by the exchange-traded structure.

Among the Precious Metals ETFdb Category, most products offer exposure to individual commodities; there are a number of gold and silver ETFs, as well as platinum and palladium products, for those looking to target a specific metal (most of the interest is in gold, though the other metals have turned in the more impressive performances recently). 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 major impact on the risk/return profile [sign up for the free ETFdb newsletter].

PowerShares DB Precious Metals Fund (DBP)

This ETF seeks to replicate an index comprised of futures contracts on gold and silver, with a heavy tilt towards the yellow metal (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 [also see The Definitive Guide To Silver ETF Investing].

The index to which DBP is linked 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)

This ETF is unique in several ways. First, GLTR includes platinum and palladium in addition to gold and silver, making it more diverse than any of the other options for achieving multi-metal precious metals exposure. Second, GLTR is physically-backed, meaning that the underlying assets are bullion stored in secure vaults. That feature eliminates any nuances related to the use of futures contracts, and means that GLTR will move in unison with changes in the spot price of the underlying metals.

Each share represents ownership of about 0.03 ounces of gold, 1.1 ounces of silver, 0.004 ounces of platinum, and 0.006 ounces of palladium. That means that exposure is tilted towards gold and silver, with the lesser known precious metals combining to account for about 12% of the exposure (gold accounts for just under half, with silver making up about 40% of the portfolio). The relative value of each component will obviously shift with market prices for each, a phenomenon that may be worth keeping an eye on for those concerned about bubbles in metals markets [also see ETFS Debuts Physically-Backed White Metal ETF].

iPath Dow Jones UBS Precious Metals ETN (JJP)

This product is unique from those profiled above for multiple reasons. Similar to DBP, this product is also linked to an index comprised of gold and silver futures contracts. But JJP 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; that means that investors in this product are exposed to the credit risk of the issuing institution (Barclays) but will avoid potential tracking error that some ETFs may experience as a result of the roll process [see more on JJP's Fact Sheet].

iPath Pure Beta Precious Metals ETF (BLNG)

The cleverly-named BLNG is also an exchange-traded note, and is similar in many ways to JJP. BLNG’s underlying index has a weight closer to 80% in gold, and this ETN is part of the recently-launched suite of “Pure Beta” ETNs from iPath. That means that the index to which this product is linked 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. If that goal is accomplished and interest income generated on uninvested cash is substantial enough, BLNG could maintain an attractive risk/return profile (of course, mitigating the impact of contango in a futures-based product is easier said than done). [See more about the 'pure beta' ETNs here]

Disclosure: No positions at time of writing.