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:
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 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.
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.
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.
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.
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.
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.
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.
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!
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.