McCall’s Call: All That Glitters Is Not Gold

September 22, 2010

When it comes to precious metals ETFs, gold is just one of a growing number of options.

The meteoric rise of gold to a new all-time high, combined with the massive amounts of media coverage of the yellow metal, has the gold bugs buzzing and their pockets growing with cash. But, as well as gold has performed in 2010, it’s not the only precious metal experiencing a boost in demand.

Matthew D. McCallThere are others, including silver, platinum and palladium that serve not only as safe-haven bets when markets are roiled by uncertainty, but also have far more industrial applications than gold.

That means investments in these other precious metals, unlike gold, take on a whole new dimension once the economy starts growing and demand for industrial materials starts ramping up.

Best of all for investors, precious metals are more and more available in an ETF package, which makes insulating portfolios from the vagaries of a world in upheaval a little easier every day.


Gold’s little cousin silver is starting to garner more attention from investors as it nears a 30-year high.

The iShares Silver ETF (NYSEArca: SLV) is up 22 percent year-to-date versus a gain of 16 percent for the SPDR Gold ETF (NYSEArca: GLD). Even more interesting are the comparisons when looking at the performance going back to the beginning of 2009. Since that time, GLD has gained 44 percent as SLV rallied 80 percent.

Silver is an interesting play because it doesn’t have the allure of gold, but it can be considered a poor man’s alternative to buying gold. Gold is now about $1,150 an ounce, while silver can be had for a mere $21 an ounce. Silver also has multiple applications, for example, in the auto industry, health care sector and water purification.

Other than SLV, currently the most popular silver ETF on the market, there are other options for investors who would like exposure to the silver sector. The alternative for an ETF that is physically backed by silver bullion is the ETFS Physical Silver Shares (NYSEArca: SIVR). With a net expense ratio of 0.30 percent it’s less than SLV’s 0.50 percent price.

When the price of the commodity rises, the value of the related mining companies typically does even better and vice versa when the price of the commodity falls. If the strategy is to ride the rally in silver, there’s the Global X Silver Miners ETF (NYSEArca: SIL). The ETF charges an expense ratio of 0.65 percent and invests in a basket of 25 global silver mining stocks. There’s a heavy concentration on Canada and
as the two North American countries make up 80 percent of the allocation. Since the end of June, SIL is up 22 percent and SLV has added 11 percent; the leverage is clearly defined with the mining ETF.

Platinum And Palladium

While both gold and silver have made big moves this year, neither one can match the 33 percent gain in the price of palladium. Platinum is up 10 percent and lagging its peers, but greatly outpacing equities.

There are three exchange-traded products (ETPs) that give investors access to the platinum sector. What’s amazing about this niche sector of ETPs is that all three products vary in the manner they track the price of platinum.

The iPath Dow Jones Platinum ETN (NYSEArca: PGM) invests in one futures contract that tracks the price of platinum. As the contract is expiring, the ETN must roll out the contract and purchase a new contract. The annual expense ratio is 0.75 percent. Year-to-date the ETN is down 1 percent.

The E-TRACS UBS Long Platinum ETN (NYSEArca: PTM) measures the collateralized returns from a basket of platinum futures contracts. The platinum futures contracts are targeted for a constant maturity of three months. The expense ratio is 0.65 percent and PTM is up 4 percent in 2010.

The ETFS Physical Platinum Shares (NYSEArca: PPLT) differentiates itself because the shares are backed by actual platinum and therefore will track the spot price of the metal, less expenses. The ETF’s expense ratio is 0.60 percent.

As of today, my firm owns a small amount of PTM, the platinum ETN, for clients and we’re looking to increase our exposure to the precious metal. Because PPLT wasn’t available when we originally purchased PTM, we’ll now look to PPLT as the best option for exposure to platinum due to the manner in which they track the metal, and the expense ratio.Investing in the big winner of 2010, palladium, can be achieved in one of two ways. The ETFS Physical Palladium Shares (NYSEArca: PALL) is similar to PPLT, in that the ETP is backed by actual palladium and therefore will track the spot price minus expenses. The expense ratio is 0.60 percent.

The First Trust ISE Global Platinum Index Fund (NYSEArca: PLTM) is composed of a basket of platinum-related stocks from around the globe. The ETF charges an expense ratio of 0.70 percent and has struggled to gain any momentum as the underlying metal has performed well.

Building A Precious Metals Portfolio

I can make a case to own all four precious metals highlighted in the article. The problem is that most investors do not have an unlimited bankroll and must decide where to put their money.

At this time the average investor might consider allocating about 10 percent of their portfolio to precious metals. Of that 10 percent, they might allocate 4 percent to gold, 3 percent to silver and the remaining 3 percent to PPLT.

Palladium is left out only due to limited funds and the fact that it has already made a big run, and I feel platinum is due for a breakout and rally in the coming months.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.

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