Your Guide to Investing in Metals ETFs
March 2nd 2010 at 11:00am by Tom Lydon
Fashion Week in New York just wrapped up, but one white-hot trend probably didn’t come up: metals exchange traded fund (ETF) investing. Thanks to deficits and continuing concerns about the global economy, these ETFs have become more popular than ever.
An increasing federal deficit coupled with a large decline in the U.S. dollar may eventually translate into rapid inflation and higher metal prices, while the dollar’s recent strength and higher interest rates could mean that precious metals will drop in value, comments Jonathan Bernstein for ETFZone. [Hedge Inflation With These ETFs.]
That’s why investors need to be prepared to act accordingly. Not all metals have a similar reaction to shifting market conditions.
ETFs offer exposure to precious metals such as gold, silver, platinum and palladium, and base metals like copper, nickel and lead. Precious metals are lightly counter-cyclical, affected by interest rates and the dollar, while base metals are highly cyclical, performing well in a strong economy. [4 Factors Influencing Metals ETFs.]
Commodity ETFs come in a variety of incarnations; which you choose is up to you. It depends on the kind of exposure you want, what kind of risk you’re willing to endure and taxes you’re willing to deal with.
Funds can be physically backed by the metal itself, it can have ownership of futures contracts to buy the metal, it can hold companies involved in the mining and production of a metal. [Copper ETN: Forging Ahead?]
A fund that is backed by the physical commodity has the metal stored in a vault. Investors should note that these funds have storage fees calculated into their expense ratios. Also, physical bullion trades are taxed by the IRS at the collectibles rate of 28% instead of the long-term equity rate of 15%. Investors should still consult their tax experts for specific advice, though. [What's Driving Platinum and Palladium ETFs?]
- SPDR Gold Shares (NYSEArca: GLD)
- iShares COMEX Gold Trust (NYSEArca: IAU)
- iShares Silver Trust (NYSEArca: SLV)
- ETFS Physical Gold (NYSEArca: SGOL)
- ETFS Physical Silver (NYSEArca: SIVR)
- ETFS Physical Platinum Shares (NYSEArca: PPLT)
- ETFS Physical Palladium Shares (NYSEArca: PALL)
Funds may also own futures contracts to buy the metal. Contracts are rolled over before expiration, and another contract is purchased in its place. Rolling over contracts generates trading fees. Futures contracts are taxed at a lower maximum rate of 23%.
- PowerShares DB Precious Metals Fund ETF (NYSEArca: DBP)
- PowerShares DB Base Metals Fund ETF (NYSEArca: DBB)
- PowerShares DB Gold Fund ETF (NYSEArca: DGL)
- PowerShares DB Silver Fund ETF (NYSEArca: DBS)
- Ultra Gold ETF (NYSEArca: UGL)
- ProShares UltraShort Gold (NYSEArca: GLL)
- ProShares Ultra Silver (NYSEArca: AGQ)
- ProShares UltraShort Silver (NYSEArca: ZSL)
Many metals ETFs give investors exposure to the companies that mine and produce the metals. While such funds don’t give you access to spot prices, they have their own advantages. One big one is that mining companies can continue to do well if a commodity’s price steps back, but remains far above the cost of production. Such funds also lack the big day-to-day swings that have a tendency to vex futures- and physically-backed metals ETFs.
- SPDR S&P Metals & Mining (NYSEArca: XME)
- Market Vectors Gold Miners (NYSEArca: GDX)
- Market Vectors Junior Gold Miners (NYSEArca: GDXJ)
- EGS DJ Emerging Markets Metals & Mining Titans (NYSEArca: EMT)
Lastly, funds may offer exposure through notes or exchange traded notes (ETNs). ETNs are taxed by the long-term equity rate of 15%. ETNs are unsecured debt backed by the full faith and credit of the issuer. They have no tracking error. [ETNs: Everything You Want to Know.]
- ELEMENTS Rogers International Commodity Metal ETN (NYSEArca: RJZ)
- E-TRACS UBS Bloomberg CMCI Industrial Metals ETN (NYSEArca: UBM)
- iPath DJ AIG Industrial Metals ETN (NYSEArca: JJM)
- PowerShares DB Base Metals Long ETN (NYSEArca: BDG)
- iPath AIG Copper (NYSEArca: JJC)
- iPath DJ AIG Lead (NYSEArca: LD)
- iPath DJ-AIG Aluminum (NYSEArca: JJU)
- iPath DJ AIG Nickel (NYSEArca: JJN)
- E-TRACS UBS Platinum (NYSEArca: PTM)
- iPath DJ AIG Platinum (NYSEArca: PGM)
- PowerShares DB Gold Short ETN (NYSEArca: DGZ)
- E-TRACS UBS Short Platinum ETN (NYSEArca: PTD)
- PowerShares DB Base Metals Double Long ETN (NYSEArca: BDD)
- PowerShares DB Base Metals Double Short ETN (NYSEArca: BOM)
- PowerShares DB Base Metals Short ETN (NYSEArca: BOS)
- PowerShares DB Gold Double Long ETN (NYSEArca: DGP)
- PowerShares DB Gold Double Short ETN (NYSEArca: DZZ)
For full disclosure, Tom Lydon’s clients own shares of XME.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.