Tuesday, January 20, 2009

Precious Metal ETFs and ETNs

So you want to invest in precious metals? You have many choices for investment vehicles. You can buy mining companies. You can buy coins - please see my post Introduction to Gold Bullion Coins. You can also purchase ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes) that track the price of various precious metals. All funds mentioned below are for US investors.

GOLD
There are 5 funds that track the price of gold:

GLD - SPDR Gold (ETF)
IAU - iShares COMEX Gold (ETF)
DGL - PowerShares Gold (ETF)
GOE - ELEMENTS Gold (ETN)
UBG - UBS E-TRACS Gold (ETN)

GLD is by far the most popular among investors, with an average daily volume of 12 million. IAU is also fairly popular, with an average daily volume of 558,000. The last three funds are not nearly as heavily traded.

Let's take a look at a 3-month comparison chart of these 5 funds:


As you can see GOE (orange line) and UBG (brown line) do not track well with the other funds. This is because they are very illiquid securities with low volume. I think we can safely eliminate these as investment choices.

If we zoom in further on the 3 remaining funds, we can see that DGL (green line) also does an inadequate job of tracking with the other funds:


DGL also has an expense ratio of .50% compared to .40% for GLD and IAU. We can safely eliminate DGL.

For most investors, GLD and IAU should perform in identical fashion so I recommend using either one.

SILVER
There are three silver funds:

SLV - iShares Silver (ETF)
DBS - PowerShares Silver (ETF)
USV - UBS E-TRACS Silver (ETN)

Let's take a look at a 3-month comparison chart of these 3 funds:


As you can see, USV (green line) does a poor job of tracking the other funds. This is because it has a daily trading volume of only 100 shares - wholly inadequate.

Let's zoom in further on the remaining funds:


We can see that DBS is also fairly illiquid. Both funds have an expense ratio of .50% so I see no reason not to use SLV.

PLATINUM
There are two platinum funds:

PGM - iPath Platinum (ETN)
PTM - UBS E-TRACS Platinum (ETN)

Let's take a look at a 3-month comparison chart:


Notice the large tracking error with these two funds. PGM is up 4% in three months while PTM is down 5%! This is not a condemnation of PTM as it actually outperforms PGM in time spans of 6 months and 1 month. This just shows that both funds are somewhat illiquid and thus you could catch a bad break if you try to move in and out of either of these funds frequently. PGM has an average volume of 13,835 while PTM stands at 37,185. PTM has an expense ratio of .65% compared to PGM's .75%, so therefore I think PTM is the better choice.

DIVERSIFIED
An alternative to precious metal specific funds are funds that track the price of multiple metals:

JJP - iPath Precious Metals (ETN) - 77.57% gold, 22.43% silver
DBP - PowerShares Precious Metals (ETF) - 81.44% gold, 18.56% silver
PMY - ELEMENTS Precious Metals (ETN) - 52% gold, 32% platnium, 8% silver, 8% palladium
CEF - Central Fund of Canada (ETF) - 58.5% gold, 37.9% silver, 3.5% cash

JJP, DBP and PMY all have relatively low trading volumes and with expense ratios of .75%, higher than those of GLD, IAU, SLV or PTM, I have a hard time recommending any of these funds. CEF, however, has high trading volume and low expenses (.43%) so I have no problem recommending it.

RECOMMENDATIONS
In summation, I recommend the following ETFs and ETNs to investors:

GLD / IAU - Gold
SLV - Silver
PTM - Platinum
CEF - Gold/Silver

COMMODITY ETF AND ETN SPREADSHEET
I compiled a list of all the funds listed here along with other commodity ETFs and ETNs available to US investors. Commodity types include precious metals, base metals, agriculture, energy and livestock. Note that I have only included those ETFs and ETNs that track the commodity prices themselves, and not funds that track commodity based companies. Also note that I have excluded any leveraged funds as well.

Click here to view the google docs spreadsheet. You can edit, save or download the document to excel.

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