It once was all about the Benjamins, but now it seems to be all about the metals. Access to the metals market is expanding at a phenomenal rate with the aid of exchange traded funds (ETFs). The popularity of the ETFs reveals the growing acceptance of commodities as a useful portfolio tool.
Since metals ETFs appeared on the scene, they’ve opened doors to new investors and shifted the supply and demand fundamentals a bit:
- ETFs have provided the average investor with a low-cost way to trade asset classes like commodities and currencies that were previously only available to institutional investors and sophisticated traders.
- Some metals ETFs, particularly those that are backed by physical bullion, have altered the supply and demand picture some by creating a new market for such metals. For example, platinum investing demand was negligible before platinum group metal funds launched; now it accounts for 11% of total demand.
- Metals ETFs have given investors new ways to hedge inflation, protect their portfolios and diversify across asset classes in a convenient and easy-to-use format.
- Metals ETFs now come in all shapes and sizes. Physically-backed, futures contracts, stocks, swaps. You can not only get the exposure, but you can choose just what type of exposure you want. [The 4 Types of Commodity ETFs.]
If you’re going to take the metals plunge, be aware of the higher tax treatment of capital gains and the fact that some funds use derivatives. [ETFs and Taxes: What You Should Know.]
Additionally, the multi-year rally in precious metals may be luring investors into a possible market correction. You can cope with that by having a sound strategy that incorporates a stop loss if and when the correction appears. [How to Follow Trends.]
Investment manager ETF Securities has benefited from the growing investor interest in the commodities market, comments John Spence for MarketWatch. The two ETFs the company offers, the ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL), have already raked in more than $700 million combined, with PPLT taking in $470 million of the total. [Fundamentals Favoring Platinum and Palladium ETFs.]
The two new offerings are physically backed by the precious metals platinum and palladium, which are also used in industrial applications. There are also three platinum exchange traded notes (ETNs): E-TRACS UBS Platinum (NYSEArca: PTM), iPath DJ AIG Platinum (NYSEArca: PGM) and E-TRACS UBS Short Platinum ETN (NYSEArca: PTD). ETNs are debt backed by the full faith and credit of the issuer, so understand this risk. [The Difference Between ETFs and ETNs.]
SPDR Gold Shares (NYSEArca: GLD) is the second-largest ETF listed in the United States, with around $40 billion in assets. Other large ETFs that give investors direct exposure to precious metals include the iShares Silver Trust (NYSEArca: SLV) and iShares COMEX Gold Trust (NYSEArca: IAU). [Your Guide to Investing in Metals ETFs.]
Another play on precious metals is through mining and natural-resource stocks. For instance, one may consider the Market Vectors Gold Miners (NYSEArca: GDX) or the Market Vectors Junior Gold Miners (NYSEArca: GDXJ), which tracks small- and mid-sized gold and silver mining companies.
First Trust has recently launched the industry’s first equity-based platinum and copper ETFs – the First Trust ISE Global Copper (NASDAQ: CU) and First Trust ISE Global Platinum (NASDAQ: PLTM). Both funds hold metals and mining stocks. [First Trust’s New Platinum and Copper ETFs.]
For more information on metals, visit our precious metals or base metals category.
Max Chen contributed to this article.