Silver ETF Investing – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds, anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Silver

Why Invest in Silver?

We live in economically uncertain times. Many investors are worried that their investments, and especially long term retirement investments, will be eroded by inflation and dollar devaluation. Commodities offer the ability to add protection to these future possibilities. Oil, natural gas, agriculture, and other precious metals, such as gold and platinum, are all good inflation hedge options for long term retirement portfolios. Silver is another example of this type of hedge, and adds a balance to other commodities investments.

Silver, often thought of as ‘poor man’s gold,’ has many uses in today’s economy. Because of silver’s industrial uses, it has demand beyond that of a currency hedge. Gold lacks this industrial demand. Over 40% of silver is used for industrial purposes ranging from photography to CDs and batteries. Silver is being implemented into some of the most high tech applications that will continue to drive this metal’s demand into the future. One example is the solar panel industry. Silver is use in 90% of all photovoltaic cells used in solar panels. Because silver is not just tied to one sector of industry (like copper to housing, platinum to cars, and gold to electronics) silver is more diverse and more able to withstand industrial slumps (like the housing bust we are going through).

Silver is a historically volatile commodity. Looking back just a few years at the range from 2007-2009 saw silver prices jumping from $13 per ounce to $21 per ounce, and then silver lost almost 50% of its value over just 7 months, only to gain most of it back over the next year. Since 2009, silver has systematically risen to a high of $46.88 per ounce, and sits today at around $33. An uncertain economic future could spell more volatility in silver going forward.

Is ‘poor man’s gold’ right for you? Are you asking yourself, “why should I invest in silver?” If you are looking to add diversity to your retirement portfolio, as well as dollar devaluation and inflation protection, silver is a good piece to add. The keyword here is diversity. Gold, copper, and silver make up a very well diversified precious metals commodity hedge.

How to Invest in Silver

Trading silver, or any precious metal for that matter, the traditional way meant gaining access to a pit trader who would then allocate money towards the commodity. Mutual funds that have positions in silver lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments.

Note: Exchange-traded notes (ETNs) are another vehicle to gaining silver exposure, but involve different credit-associated risks.

There are two categories of silver ETF investments:

  1. Direct
  2. Indirect

Investing directly in silver utilizes ETFs that track an index, silver contract futures, or physical silver holdings. This is what commodities investing is all about. Indirect silver investing involves ETFs or ETNs that buy equity in companies that deal with silver production and supply, namely the mining industry. Since the revenues of these companies are directly related to the price of silver, it is a good way to indirectly hold silver.

Below is a breakdown of the different types of silver ETFs (or silver ETNs) available.

Index Funds

Index ETFs are funds that track a specific index. For example, as the Deutsche Bank Liquid Commodity Index goes up or down, so do specific ETFs that track this index.

Silver Futures Funds

Some silver ETFs trade in futures contracts. The silver ETF or ETN purchases the front month futures contract on the NYMEX, for example. When the front month is within 2 weeks of expiration, they will ‘roll’ the contract into the next month (or sell the position from the front month and buy positions in the next month). This ensures that your position in silver will always be ‘long.’

Leveraged Silver Funds

Leveraging is one of the great tools that often comes with ETF or ETN investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the ProShares Ultra Silver ETF (AGQ) is leveraged 2x in an attempt to double your return on silver prices. It is not uncommon to find a 2x silver ETF or 3x silver ETF among the different leveraged silver ETF options on the market.

Inverse Silver Funds

What if you think that the price of silver has over-reached, and you want to bet against the price of silver and make money on it? There are two ways to go about doing this. You can short a silver index ETF or ETN (an ETF short silver, silver short ETF, or double short silver ETF option), which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse silver ETFs and ETNs available. These funds are basically doing the short selling for you, as they track the inverse of the index fund or price of the commodity. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the silver price or index, but triples the return of the short position).

Trading Silver ETF Options

Buying or selling call or put silver options is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in silver price, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how you are allocating your money.

Gold ETF List Of Options

iShares Silver Trust ETF (SLV)

Founded in 2006, SLV seeks to reflect the price of silver. SLV is intended to constitute a simple and cost-effective means of making an investment similar to an investment in physical silver. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.

Physical Swiss Physical Silver Shares Trust ETF (SIVR)

Founded in 2009, SIVR offers you the opportunity to invest in a silver ETF that has physical backing, or in other words, the fund actually physically holds silver. SIVR seeks to replicate the price of silver bullion. The shares are backed by physical allocated silver bullion held by the custodian. All physical silver held conforms to the London Bullion Market Association’s rules for good delivery. Because SIVR is a physical silver ETF, they are very transparent in their holdings, as they publish them regularly on their site.

PowerShares DB Silver Fund (DBS)

Founded in 2007, DBS tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Silver Excess Return. The index is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver. DBS is an example of an index ETF, and the index fund utilizes a futures-based investing strategy rather than holding physical silver bullion.

E-TRACS USB Bloomberg Commodity (USV)

USV, founded in 2008, tracks the price and performance yield of the UBS Bloomberg CMCI Silver Total Return index. The fund is designed to be representative of the entire liquid forward curve of the silver contracts. The index measures the collateralized returns from a basket of silver futures contracts. It is comprised of the silver futures contracts included in the CMCI with five target maturities.

ProShares Ultra Silver (AGQ)

Also founded in 2008, AGQ seeks to provide daily investment results that correspond to twice (200%) the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund invests in any one of or combinations of the financial instruments (swap agreement, futures contracts, forward contracts, option contracts) with respect to the applicable fund’s benchmark to the extent determined appropriate by the Sponsor. AGQ is an example of a leveraged 2x silver ETF.

ProShares UltraShort Silver (ZSL)

ZSL, also founded in 2008, seeks to provide daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund invests in any one of or combinations of the financial instruments (swap agreement, futures contracts, forward contracts, option contracts) with respect to the applicable fund’s benchmark to the extent determined appropriate by the Sponsor. ZSL is the exact opposite of AGQ and is an example of an inverse leveraged silver ETF.

PowerShares DB Precious Metals ETF (DBP)

Founded in 2007, DBP tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Precious Metals Excess Return. The index is a rules-based index composed of futures contracts on two of the most important precious metals – gold and silver. The index is intended to reflect the performance of the precious metals sector. DBP is an ETF option for an investor looking to add both gold and silver exposure to their portfolio.

iPath DJ-UBS Precious Metals Sub-Index ETN (JJP)

Another precious metals investment option founded in 2008, JJP seeks tracks the Dow Jones-UBS Precious Metals Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in gold and silver futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills. This is an ETN option, and has credit-associated risks. If you are looking for a combination of gold and silver exposure, JJP is an option for you.

In Conclusion

Adding commodity exposure to your portfolio through ETF or ETN investing is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results.

Silver, often called ‘poor man’s gold,’ has become a valued asset in recent years, and has proven to be an effective inflation hedge. While it’s price is quite volatile, silver offers a good balance to other precious metals such as gold, copper, and platinum. If you are looking for ways to hedge against inflation and devaluation of the dollar, utilizing a silver ETF or ETN to gain exposure to this commodity is a great option.

Disclosure

I have no positions in any ETFs or ETNs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.

Finding The Best Gold ETF – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds, anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Gold

Why Invest in Gold?

In today’s uncertain economy, investors are always looking for ways to hedge against inflation and future uncertainty in the markets. There are many different commodities that offer inflation protection, namely oil, natural gas, and agriculture related commodities. Precious metals are probably the most popular of them all, with gold leading the way.

Gold is every investor’s ‘safe haven’ investment. Gold has proven time and again that it will continue to appreciate in value during economically uncertain times. But why does the value of gold go up when everything else struggles?

The answer to that question lies at the root of the problem during sour economies – inflation. Inflation is tracked by the CPI or consumer price index. As the cost of goods and services increases (because of supply and demand shifts), the CPI goes up. Inflation can rear its ugly head during down economies. But it isn’t just the increase of prices and inflation that makes gold a good investment. It is the devaluation of the dollar.

If you have kept up with the Federal Reserve in recent months (early 2012), you are well aware of the ‘quantitative easing’ going on. This easing has seen the Fed’s interest rate drop in the last few years to almost zero percent. The near zero percent interest rate by the Fed allows banks to borrow money for basically nothing and lend it out for a 3-6% return. This is a form of stimulus that the Fed participates in during recessions to spur job creation and credit flow. To lend money to the banks, the Fed has to crank up the printing presses and make new money. This dilutes the money already on the market. This is where devaluation of the dollar occurs, and while most economists don’t think the US is in any danger of hyperinflation (or the scenario where we would have to add zeros to our money every few weeks), it is hard to argue against the drag the dollar has been on currency markets the last few years.

Therefore, gold is an investment that will allow you to protect your portfolio against further dollar devaluation in the future.

It is important to note that China, among other world powers, has been shifting focus to gold and silver over investments in US Treasuries.

How to Invest In Gold

Trading gold, or any precious metal for that matter, the traditional way meant gaining access to a pit trader who would then allocate money towards the commodity. Mutual funds that have positions in copper lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments. Below are outlined different methods of how to invest in ETF gold options.

Note: Exchange-traded notes (ETNs) are another vehicle to gaining gold exposure, but involve different credit-associated risks.

There are two categories of gold ETF (or ETN) investments:

  • Direct
  • Indirect

Investing directly in gold utilizes ETFs or ETNs that track an index, gold contract futures, or physical gold holdings. This is what commodities investing is all about. Indirect gold investing involves ETFs or ETNs that buy equity in companies that deal with gold production and supply, namely the mining industry. Since the revenues of these companies are directly related to the price of gold, it is a good way to indirectly ‘hold’ gold.

Below is a breakdown of the different types of gold ETFs (or gold ETNs) available.

Gold Index Funds

Index ETFs are funds that track a specific index. For example, as the Market Vectors Junior Gold Miners Index goes up or down, so do specific ETFs that track this index. Many gold benchmark ETF options track specific benchmark idecies.

Gold Futures Funds

Some gold ETFs trade in futures contracts. The gold ETF or ETN purchases the front month futures contract on the NYMEX, for example. When the front month is within 2 weeks of expiration, they will ‘roll’ the contract into the next month (or sell the position from the front month and buy positions in the next month). This ensures that your position in gold will always be ‘long.’

Leveraged Gold Funds

Leveraging is one of the great tools that often comes with ETF or ETN investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the Direxion Daily Gold Miners Bull 3x Shares ETF (NUGT) is leveraged 3x in an attempt to triple your return on gold prices. It is not uncommon to find a 2x gold ETF or 2x gold ETN among the different leveraged gold ETF options on the market.

Inverse Gold Funds

What if you think that the price of gold has over-reached, and you want to bet against the price of gold and make money on it? There are two ways to go about doing this. You can short a gold index ETF or ETN, which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse ETFs and ETNs available. These funds are basically doing the short selling for you, as they track the inverse of the index fund or price of the commodity. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the gold price or index, but triples the return of the short position).

Trading Gold ETF Options

Buying or selling call or put options for a gold ETF is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in gold price, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how you are allocating your money.

Gold ETF List Of Options

ETFS Physical Swiss Gold Shares (SGOL)

SGOL was founded in 2009 and tracks the performance of the price of gold bullion. The trust holds physical gold bullion. The Shares are designed for investors who want a cost-effective and convenient way to invest in gold with minimal credit risk. The advantages of utilizing SGOL to gain gold exposure include: minimal credit risk, flexibility and ease of investment, and low expenses. If you want an ETF that physically holds gold, SGOL might be for you.

ETFS Physical Asian Gold Trust (AGOL)

AGOL is another option of ETF that physically holds gold. AGOL tracks the price of gold bullion. The shares are designed for investors who want a cost-effective and convenient way to invest in gold with minimal credit risk. See SGOL as an alternative. AGOL and SGOL are examples of direct gold investing.

Market Vectors Gold Miners ETF (GDX)

Founded in 2006, GDX tracks as closely as possible the price and yield performance of the NYSE Arca Gold Miners Index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts of companies involved in the gold mining industry. GDX is an example of an indirect ETF option, since it mostly involves equity of mining companies.

Market Vectors Junior Gold Miners ETF (GDXJ)

GDXJ is similar to GDX, but focuses on small to mid cap companies interested in gold mining and exploration. Founded in 2009, GDXJ tracks the Market Vectors Junior Gold Miners index. The fund invests at least 80% of total assets in securities that comprise the index. The index tracks the overall performance of foreign and domestic publicly traded companies of small- and medium-capitalization that are involved primarily in the mining for gold and/or silver. GDXJ is another example of indirect gold investing.

Direxion Daily Gold Miners Bull 3x Shares ETF (NUGT)

NUGT, founded at the tail end of 2010, is seeking serious returns. NUGT tracks 300% (3x) of the performance of the NYSE Arca Gold Miners Index. The fund creates long positions by investing at least 80% of net assets in the equity securities that comprise the index and/or financial instruments that provide leveraged and unleveraged exposure to the index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments. If you are looking for a leveraged gold ETF, NUGT might be for you.

Direxion Daily Gold Miners Bear 3x Shares ETF(DUST)

DUST is basically the opposite of NUGT. Founded in late 2010 as well, DUST tracks 300% (3x) of the inverse (or opposite) of the performance of the NYSE Arca Gold Miners Index. DUST creates short positions by investing 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the index.

E-TRACS USB Bloomberg Commodity Gold Total Return ETF (UBG)

Founded in 2008, UBG tracks the price and performance yield of the UBS Bloomberg CMCI Gold Total Return index. The fund is designed to be representative of the entire liquid forward curve of the gold contracts. The index measures the collateralized returns from a basket of gold futures contracts. It is comprised of the gold futures contracts included in the CMCI with five target maturities. UBG is an index ETF that utilizes a futures-based trading strategy.

Gold ETNs

RBS Gold Trendpilot Exchange ETN (TBAR)

TBAR tracks the RBS Gold Trendpilot index (USD). The index utilizes a systematic trend-following strategy to provide exposure to either the Price of Gold Bullion (as defined below) or the yield on a hypothetical notional investment in 3-month U.S. Treasury bills (the ‘Cash Rate’), depending on the relative performance of the Price of Gold Bullion on a simple historical moving average basis. Because TBAR is an ETN, there are credit-associated risks with this investment.

VelocityShares 3x Long Gold ETN (UGLD)

UGLD was founded near the end of 2011 and tracks the S&P GSCI Gold Index. Since it is a leveraged ETN, it seeks three times (3x) the daily return of the index.

VelocityShares 3x Inverse Gold ETN (DGLD)

DGLD, also founded near the end of 2011, tracks the S&P GSCI Gold Index, but because it is an inverse leveraged ETN, it seeks three times (3x) the inverse (or opposite) of the daily return of the index.

In Conclusion

Adding commodity exposure to your portfolio through ETF or ETN investing is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results.

Gold is every investor’s favorite ‘safe haven’ investment, and the recent surge of gold prices in the past few years only shows the level of uncertainty in the dollar and in the economy as a whole. If you are looking for ways to hedge against inflation and devaluation of the dollar, utilizing a gold ETF or ETN to gain exposure to this commodity is a great option. Use this information as a starting point to find the best gold ETF for your portfolio.

Disclosure

I have no positions in any ETFs or ETNs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.

Copper ETF Basics – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds (ETFs), anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Copper

Why Invest in Copper?

Most investors looking to add commodity exposure to their portfolios think of oil, gold, and agriculture commodities. These are great positions to have to protect against future inflation. But what about a commodity that will rise with future economic growth? This is where copper comes in.

Copper is technically a precious metal, but definitely doesn’t have the ‘jewelry based’ value of gold or silver. The value of copper is in what it can be used for. Copper is widely used in construction, from pipes in plumbing and roofing to high tech machinery. Many investors see copper as a leveraged play on the health of the global economy, since increased building and production will demand more copper to be used.

One thing to keep in mind is that during economically poor times, the bottom can fall out in the demand for and price of copper. Diversity is the key to weathering hard times. Positions in copper, as well as gold and silver, will hedge you against future uncertainty.

How to Buy Copper Positions

Investing in copper, or any precious metal for that matter, the traditional way meant gaining access to a pit trader who would then allocate money towards the commodity. Mutual funds that have positions in copper lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments.

Note: There may not be many options available for strictly copper ETFs. Exchange-traded notes (ETNs) are another vehicle to gaining copper exposure, but have different credit-associated risks associated with them.

Copper ETFs (or ETNs) can track different aspects of this commodity, such as:

  • Mining industry
  • Construction industry
  • Physical copper

Diversified copper funds will include all of these at some pre-determined percentage. There are several different methods for trading copper ETFs. These methods are discussed below.

Index Funds

Index ETFs are funds that track a specific index. For example, as the First Trust ISE Global Copper Index goes up or down, so do specific ETFs that track this index.

Copper Futures Funds

Some copper ETFs trade in futures contracts. The copper ETF or ETN purchases the front month futures contract on the NYMEX, for example. When the front month is within 2 weeks of expiration, they will ‘roll’ the contract into the next month (or sell the position from the front month and buy positions in the next month). This ensures that your position in copper will always be ‘long.’

Leveraged Funds

Leveraging is one of the great tools that often comes with ETF or ETN investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the VelocityShares 2x Long Copper ETN (LCPR) is leveraged 2x in an attempt to double your return on copper prices. It is not uncommon to find a 2x copper ETF or 2x copper ETN among the different leveraged copper ETF options on the market.

Inverse Funds

What if you want to bet against the price of copper and make money on it? There are two ways to go about doing this. You can short a copper index ETF or ETN, which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse ETFs and ETNs available, which are basically short copper ETF options. These funds are basically doing the short selling for you, as they track the inverse of the index fund or price of the commodity. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the copper price or index, but triples the return of the short position).

Trading ETF Options

Buying or selling call or put options for a copper ETF is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in copper price, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how you are allocating your money.

Copper ETF List Of Options

First Trust ISE Global Copper Index Fund (CU)

Founded in 2010, CU tracks the price and yield of an equity index called the ISE Global Copper Index. The fund invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index is designed to provide a benchmark for investors interested in tracking public companies that are active in the copper mining business based on analysis of revenue derived from the sale of copper. CU is an example of an index ETF that doesn’t involve futures based trading aspects, since the fund invests in equities.

Global X Copper Miners ETF (COPX)

COPX tracks the price and yield performance of the Solactive Global Copper Miners Index. The fund invests 80% of assets in securities and depositary receipts that comprise the index. The index is designed to measure broad based equity market performance of global companies involved in the copper mining industry. The fund uses a replication strategy. COPX is similar to CU, in that it utilizes an equities based trading strategy to gain exposure to the copper mining industry and its companies. While CU is a more broad-based mining index fund tracker, COPX strictly tracks the mining and supply of copper.

United States Copper Index Fund (CPER)

Founded at the end of 2011, CPER tracks the SummerHaven Copper Index. CPER invests to the fullest extent possible in the Benchmark Component Copper Futures Contracts. It also invests in Treasuries and holds cash and/or cash equivalents to meet its current or potential margin or collateral requirements with respect to its investments in Copper Interests and invests cash not required to be used as margin or collateral. The index is a single-commodity index designed to be an investment benchmark for copper as an asset class. The Copper Index is composed of copper futures contracts on the COMEX exchange. CPER is an example of an index ETF with a futures-based trading strategy.

Copper ETNs

iPath Dow Jones UBS Copper Total Return ETN (JJC)

Founded in 2007, JJC tracks the price and yield performance of the Dow Jones-UBS Copper Total Return Sub-Index. The note is designed to reflect the performance on copper contracts. The index is composed of Copper High Grade futures contract traded on the New York Commodities Exchange. JJC is one of the oldest copper funds on the market today, and it not only tracks the spot price of copper, but also the futures curve. JJC is an ETN, which has different risks associated with it than a traditional ETF.

iPath Pure Beta Copper ETN (CUPM)

CUPM tracks the Barclays Capital Copper Pure Beta TR index. The index is comprised of a single exchange traded futures contract, except during the roll period when the Index may be comprised of two futures contracts. However, unlike many commodity indices which roll their exposure to the corresponding futures contract on a monthly basis in accordance with a pre-determined roll schedule, it may roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Capital Pure Beta Series 2 Methodology. This roll strategy mitigates the risk of futures contago, but because CUPM is an ETN, it has other credit associated risks similar to that of JJC.

VelocityShares 2X Inverse Copper ETN (SCPR)

SCPR is looking to return twice (2x) the opposite (inverse) of the S&P GSCI Copper Index ER. The index comprises futures contracts on a single commodity and is calculated according to the methodology of the S&P GSCI Index. SCPR is an example of a leveraged inverse copper ETN, and has specific risks associated with it (inverse, leveraged, futures based strategy, and credit associated risks).

VelocityShares 2X Long Copper ETN (LCPR)

Founded in early February 2012, LCRP tracks the S&P GSCI Copper Index Excess Return (200%). LCPR is a 2x leveraged copper ETN. The index is composed entirely of copper futures contracts and is derived by reference to the price levels of the futures contracts on a single commodity as well as the discount or premium obtained by “rolling” hypothetical positions in such contracts forward as they approach delivery.

In Conclusion

Adding commodity exposure to your portfolio through ETF or ETN investing is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results.

Copper is a unique example of a commodity that will grow in value along with the economy, and a great way to diversify your precious metals positions with a commodity that will often go in the opposite direction from the others. Good luck and happy investing!

Disclosure

I have no positions in any ETFs or ETNs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.

Investing In A Precious Metals ETF – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds, anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Why A Precious Metals ETF?

We live in economically rough times. In the wake of the most recent recession, jobs are scarce, home values have decreased, and many retirement portfolios have been severely depleted. One of the biggest problems that our economy could face in the near future is inflation. Inflation is normally tracked with the consumer price index, or CPI. This index tracks the price of common goods and services throughout the country, and is a good judge of inflation.

The real cause for concern is the devaluation of the dollar. As the Fed prints more and more money as a way to stimulate the economy (quantitative easing), the value of that money decreases. Increased inflation is a way to see this devaluation in action.

Many investors are worried that their portfolios won’t be able to keep up with inflation if there is a spike in the CPI. Very conservative investment strategies that yield under 5% return might end up being a wash if inflation reaches that number. This is especially troublesome for retirees that live off of their investment returns. There are a few different commodities that offer an inflation and a dollar devaluation hedge. These include oil, agriculture, and precious metals.

The precious metals category, when relating to commodities, includes gold, silver, platinum, and palladium most commonly, but also can include copper and nickel. These metals offer protection against dollar devaluation and inflation. In recent years, we have seen the prices of these metals skyrocket into almost unbelievable price ranges. Any investment strategy, and especially a retirement plan, should seriously consider adding exposure to precious metals through an ETF.

How To Buy Precious Metals

Trading precious metals the traditional way meant gaining access to a pit trader, or physically buying the commodity in question. Mutual funds that have positions in precious metals lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments.

When dealing with precious metals, it is not uncommon to find an ETN rather than an ETF. A precious metals ETN is basically a debt product similar to a bond that is issued by a major bank or other supplier as a senior debt note. This differs from an ETF, which is an actual security or commodity or currency derivative, such as options, forwards, and futures. ETNs have different risks associated with them than ETFs, the biggest being credit risk. Keep this in mind if you find a precious metals ETN that you are interested in.

ETFs in precious metals can be broken down into:

  • Broad precious metals ETF
  • Specific precious metal ETF

Broad precious metals funds include holdings in:

  • Gold
  • Silver
  • Platinum
  • Palladium
  • Nickel
  • Copper

The first four are the most common precious metals exchange options, and the later two are sometimes incorporated into a broad precious metals fund. The specific precious metal ETF is mostly exclusive with the type of metal you are intereted in. If you want to add gold exposure to your portfolio, look for the best gold ETF to add. If you want silver exposure, look for a silver ETF. Broad ETFs are nice because they allow you to add exposure to all the different metals in one trade, making it easy to diversify.

There are several different methods for trading precious metals ETFs. These methods are discussed below.

Index Funds

Index ETFs are funds that track a specific index. For example, the PowerShares DB Precious Metals (DBP) ETF tracks the Deutsche Bank Liquid Commodity Index – Optimum Yield Precious Metals Excess Return. As the index goes up or down, so does the share price of DBP.

Leveraged Funds

Leveraging is one of the great tools that often comes with ETF investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the ProShares Ultra Gold (UGL) ETF seeks to double the return on the value of gold bullion. It is not uncommon to find a 2x gold ETF or 3x gold ETF among the different leveraged precious metals ETF options on the market.

Inverse Funds

What if you want to bet against the price of precious metals and make money on it? There are two ways to go about doing this. You can short a precious metals index ETF, which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse ETFs available. These funds are basically doing the short selling for you, as they track the inverse of the index fund. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the precious metals index, but triples the return of the short position).

Trading ETF Options

Buying or selling call or put options for a precious metals ETF is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in precious metal prices, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how your are allocating your money.

Precious Metals ETF List Of Options

Broad Precious Metals ETFs

PowerShares Global Gold & Precious Metals (PSAU)

PSAU tracks the NASDAQ OMX Global Gold and Precious Metals Index. Founded in 2008, PSAU invests at least 90% of assets in the securities and ADRs and GDRs based on the securities that comprise the underlying index. It normally invests at least 80% of total assets in securities of companies involved in the gold and other precious metals mining industries. The index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the gold and other precious metals mining industry. PSAU is an example of a broad precious metals ETF.

iPath Pure Beta Precious Metal  (BLNG)

BLNG tracks the Barclays Capital Commodity Index Precious Metals Pure Beta TR index. The index is comprised of a basket of exchange traded futures contracts, and uses an allocation methodology designed to mitigate the effects of certain distortions in the commodity markets on such returns. This ETF utilizes a different futures roll strategy to limit risks. BLNG is another example of a broad precious metals fund.

Gold ETFs

Direxion Daily Gold Miners Bear (DUST)

Founded in 2010, DUST seeks daily investment results of 300% of the inverse (or opposite) of the performance of the NYSE Arca Gold Miners Index. The fund creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, provide leveraged and unleveraged exposure to the index. DUST is an example of an inverse leveraged 3x gold ETF.

FactorShares 2X Gold Bull S&P50 (FSG)

Founded in early 2011, FSG seeks to replicate twice the daily return of the Gold Bull/S&P500 Bear index. The fund is is designed for investors who believe that gold will increase in value relative to the large-cap U.S. equity market segment, in one day or less, by primarily establishing a leveraged long position in Gold futures and a leveraged short position in the E-mini S&P 500 Stock Price index futures. FSG is an example of a leveraged 2x gold ETF.

Silver ETFs

PowerShares DB Silver Fund (DBS)

Founded in 2007, DBS tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Silver Excess Return. The index is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver.

ETFS Physical Silver Shares Tru (SIVR)

SIVR seeks to replicate the price of silver bullion. The shares are backed by physically allocated silver bullion. All physical silver held conforms to the London Bullion Market Association’s rules for good delivery. If you are looking for an ETF that actually physically holds the commodity in question, SIVR is a good example of such a fund.

Platinum and Palladium ETFs

First Trust ISE Global Platinum (PLTM)

PLTM tracks the ISE Global Platinum Index. The fund invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index is designed to provide a benchmark for investors interested in tracking public companies that are active in platinum group metals (PGM) mining based on revenue analysis of those companies. PLTM is a non-diversified ETF.

ETFS Physical Platinum Shares (PPLT)

Founded in 2010, PPLT seeks to reflect the performance of the price of physical platinum. This is another example of an ETF that physically holds the commodity, and is a great way for an investor to manage credit risk that is associated with other ETFs and ETNs.

ETFS Physical Palladium Shares (PALL)

Also founded in 2010, PALL seeks to reflect the performance of the price of physical palladium. PALL is designed for investors who want a cost-effective and convenient way to invest in palladium with minimal credit risk. Advantages of investing in the Shares include: Ease and Flexibility of Investment, Expenses, Minimal Credit Risk.

Copper ETFs

First Trust ISE Global Copper I (CU)

Founded in 2010, CU tracks the ISE Global Copper Index. The fund invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index is designed to provide a benchmark for investors interested in tracking public companies that are active in the copper mining business based on analysis of revenue derived from the sale of copper. CU is non-diversified.

Global X Copper Miners ETF (COPX)

COPX, founded in 2010, tracks the price and yield performance of the Solactive Global Copper Miners Index. COPX invests at least 80% of assets in securities and depositary receipts that comprise the index. The index is designed to measure broad based equity market performance of global companies involved in the copper mining industry.

Nickel ETNs

iPath Dow Jones UBS Nickel Subi (JJN)

Founded in 2007, JJN tracks the price and yield performance of the Dow Jones-UBS Nickel Total Return Sub-Index.  The note is designed to reflect the performance of nickel. The index is composed of the Primary Nickel futures contract traded on the London Metal Exchange. This is an example of an ETN, and has different credit risk associated with it than an ETF.

iPath Pure Beta Nickel ETN (NINI)

NINI is another ETN for nickel. NINI seeks to replicate the Barclays Capital Nickel Pure Beta TR index. The index is comprised of a single exchange traded futures contract, except during the roll period when it may be comprised of two futures contracts. NINI utilizes a specific roll schedule and futures strategy to limit futures roll price risk impact. NINI is another example of an ETN rather than an ETF.

In Conclusion

Adding commodity exposure through ETF investing to your portfolio is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results. Precious metals ETFs are an attractive asset to include for these reasons. Use the list above to start your precious metals research. As always, good luck!

Disclosure

I have no positions in any ETFs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.