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How to Buy a Precious Metal ETF

By Edited May 18, 2015 0 0

Commodity Exchange-Traded Funds Focused on Precious Metals

What are Precious Metal ETFs?

Exchange-Traded Funds (ETFs) are investment funds traded like stocks on stock exchanges. Unlike stocks, ETFs are entities that do not really operate a business. Rather, ETFs invest in a specific class of assets which could be a certain class of stocks, bonds, or commodities like precious metals. 

ETFs have been available in the US since 1993 and in Europe since 1999. Early ETFs were index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs. Actively managed ETFs attempt to trade in and out of various assets to gain profit instead of passively tracking a predefined basket of assets like the S&P 500. 

The Precious Metal ETF is one of the newer classes of ETF in the market, with many of the first commodity ETFs being gold exchange-traded funds offered on various exchanges.

The first gold exchange-traded fund was ASX listed Gold Bullion Securities launched in 2003. Still a market leader, the first silver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006. 

Copper Pennies by the Ton

 

ETFs with Physical Precious Metal Holdings vs Paper Holding ETFs

Some funds actually own physical metal, including GLD (Gold), SLV (Silver), PALL (palladium) and PPLT (platinum).  

 

Less secure than funds that actually hold physical metal, most Precious Metal ETCs use a futures trading strategy.  Investing in  precious metals futures may produce quite different results from owning the real metal commodities.  Uneducated investor may not realize that is the methods used by these futures orient funds use to gain exposure to their underlying commodities has little to do with the actual ups and downs of the precious metal markets. Rather, these ETFs roll so-called front-month futures contracts from month to month. This does give exposure to the commodity, but subjects the investor to risks involved in different prices along the term structure, such as a high cost to roll.  

Examples of paper backed funds are copper focused CPER and CUPM.  They invest in futures.

A third type of "precious metal" ETF are funds that invest in mining stocks as a way to get exposure to the metal that these mining companies have in "in ground" reserves and in inventory in process.  Of course these mining companies themselves use futures contracts to pre-sell production at a known price, protect against market fluctuations and other reasons.  Investing in a gold mining company is related to investing in gold, but VERY different.  Gold (or silver, copper etc) mining is a business with all kinds of risks including management competence, potential for fraud (think BRE-X), changes in political conditions in some of the world's most unstable areas, changes in cost of operations, and the failure of estimates to pan out.   

In contrast the hard money ETFs like SLV actually warehouse pallets of silver bars. Those silver bars hold their value a lot better than paper contracts that can be defaulted on.

The price the ETF shares is based roughly on:

The spot price of silver  TIMES inventory of silver in the fund DIVIDED BY number of ETF shares outstanding AFTER adjustments for operating and storage costs.

Be sure to read up on any ETF you are thinking about investing in so you really understand what you are buying before you put your money in.

Should You Hold Precious Metal ETFs?

Commodity ETFs are simple and efficient and provide exposure to precious metals.  Some offer a pure play on a single metal while others offer a basket of metals or even a wider basket of commodities.  Any online brokerage or traditional stock broker can sell you Precious Metal ETF units.  

ETFs are also considered a tax advantaged investment but for investors purchasing through tax sheltered investment vehicles this is not an important factor. 

Junk Silver Coins

In a market collapse or crisis situation, however, ETFs are not the answer to having hard physical precious metals on hand.  They lack the anonymity and portability of physical silver and gold coins and bars and the ETF shares can't be spent on groceries or transport in a crisis.  While there are controls and oversight on the Precious Metal ETFs there is ultimately no guarantees that the ETF holds as much physical metal as the fund claims (for the funds that hold physical instead of futures).    

Use Precious Metal ETF's in you investment plan wisely but don't rely on them to replace physical precious metals which are an important part of any investment strategy. 

Online Broker vs Traditional Broker

In the securities industry, a discount stock brokerage helps clients buy and sell securities on a stock exchange, but the discount brokerage allows its clients to trade online for their own account without relying on a person to execute the trade. Some discount brokers, like Bank of America, even offer no-commission trades to their clients with larger account balances.

Some discount brokers, like TD Ameritrade and E-Trade, provide advanced trading systems, which appeal to frequent and active traders who do not see the need for a broker's advice. Investors who feel they need advice tend to go to traditional brokers who charge more but are supposed to add value to the trade.

If you have already researched which precious metal ETF you want to own and understand why you want to own it, then there is little need for a traditional broker.  Instead, enhance your yield by cutting down on transaction fees by using the cheapest online discount broker you can find that is trustworthy. 

You should also consider the wisdom of actively trading in and out of precious metal positions, or following a buy and hold strategy to investing in precious metal ETFs.

Here is a list of precious metal ETFs to get you started on your research.

iShares Silver Trust Fund (SLV)  

streetTRACKS Gold Shares ETF (GLD) 

ELEMENTS MLCX Precious Metals ETN (PMY)

ETFS Precious Metals Basket Trust ETF (GLTR)

ETFS White Metals Basket Trust ETF (WITE) 

iPath Dow Jones-AIG Precious Metals Total Return Sub-Index ETN (JJP)

PowerShares DB Precious Metals Fund (DBP)

BMO Precious Metals Commodities Index ETF (ZCP-TSX)

ETFS Leveraged Precious Metals ETF (LPMT-LSE)

ETFS Physical PM Basket ETF (PHPM-LSE)

ETFS Physical PM Basket Sterling ETF (PHPP-LSE)

ETFS Precious Metals ETF (AIGP-LSE)

ETFS Short Precious Metals ETF (SPMT-LSE)

Gold Bullion Securities ETF (GBS-LSE)

Gold Bullion Securities ETC (Sterling) ETF (GBSS-LSE)

ETFS Silver ETF (SLVR-LSE)

ETFS Short Silver ETF (SSIL-LSE)

ETFS Short Platinum ETF (SPLA-LSE)

ETFS Short Gold ETF (SBUL-LSE)

ETFS Platinum ETC ETF (PLTM-LSE)

ETFS Physical Swiss Gold ETC ETF (SGBS-LSE)

ETFS Physical Silver Sterling ETF (PHSP-LSE)

ETFS Physical Silver ETF (PHAG-LSE)

ETFS Physical Platinum ETF (PHPT-LSE)

ETFS Physical Palladium ETF (PHPD-LSE)

ETFS Physical Gold Sterling ETF (PHGP-LSE)

ETFS Physical Gold ETF (PHAU-LSE)

ETFS Leveraged Silver ETF (LSIL-LSE)

ETFS Leveraged Platinum ETF (LPLA-LSE)

ETFS Leveraged Gold ETF (LBUL-LSE)

ETFS Gold Sterling ETF (BULP-LSE)

ETFS Gold ETF (BULL-LSE)

iShares COMEX Gold ETF US (IGT-TSX)

Horizons BetaPro COMEX Gold Bullion Bull Plus ETF (HBU-TSX)

Horizons BetaPro COMEX Gold Bullion Bear Plus ETF (HBD-TSX)

COMEX Silver ETF (HUZ-TSX)

COMEX Silver Bull Plus ETF (HZU-TSX)

COMEX Silver Bear Plus ETF (HZD-TSX)

COMEX Gold ETF (HUG-TSX)

Claymore Gold Bullion ETF (CGL-TSX)

ProShares UltraShort Silver ETF (ZSL)

ProShares UltraShort Gold ETF (GLL)

ProShares Ultra Silver ETF (AGQ)

ProShares Ultra Gold ETF (UGL)

PowerShares DB Silver Fund (DBS)

PowerShares DB Gold Short ETN (DGZ)

PowerShares DB Gold Fund (DGL)

PowerShares DB Gold Double Short ETN (DZZ)

PowerShares DB Gold Double Long ETN (DGP)

iShares COMEX Gold Trust Fund (IAU)

iPath Dow Jones-AIG Platinum Total Return Sub-Index ETN (PGM)

FactorShares 2X Gold Bull/S&P 500 Bear ETF (FSG)

ETFS Physical Swiss Gold Shares ETF (SGOL)

ETFS Physical Silver Shares ETF (SIVR)

ETFS Physical Platinum Shares ETF (PPLT)

ETFS Physical Palladium Shares ETF (PALL)

ETFS Asian Gold Trust ETF (AGOL) 

ELEMENTS MLCX Gold ETN (GOE)

E-TRACS S&P 500 Gold-Hedged Index ETN (SPGH)

E-TRACS CMCI Silver ETN (USV)

E-TRACS CMCI Short Platinum ETN (PTD)

E-TRACS CMCI Long Platinum ETN (PTM)

E-TRACS CMCI Gold ETN (UBG)

 

Copper Pennies by the Ton
Credit: portlandmint.com
Junk Silver Coins
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