This week, gold fell to a new six-month low, down below $1,600 for the first time since July 2012, likely disappointing the scores of investors currently investing in gold.
In the rush into major gold funds like the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), however, investors seem to have forgotten that gold isn’t the only precious metal out there that can be used as an inflation hedge.
Just as with any asset class, passive investors would do better to diversify their precious metals exposure than to put all of their eggs in one shiny basket. Single securities will sometimes beat the diversified basket, but active pickers have to contend with single-security risk—right now, that risk obviously being that GLD and IAU could fall 7 percent in three months.
The precious metals baskets on the market all hold large amounts of gold, so they’re still very responsive to movements in gold, but they hold exposure to other precious metals as well.
There are two main types of precious metals basket ETFs. The first type is relatively narrow, holding strictly gold and silver, while the second type broadens its portfolio to include platinum and palladium as well. The precious metals baskets can be further differentiated by their method of exposure:Some use futures contracts, while others actually hold the physical metal.
There are six precious metals ETPs currently on the market, but the biggest are the PowerShares DB Precious Metals Fund (DBP) and the ETFS Physical Precious Metals Basket (GLTR). These two ETFs are as different as they can be:DBP uses futures contracts and only holds gold and silver, while GLTR holds a broad portfolio of all four physical precious metals.
Of the remaining four, two—the iPath Dow Jones-UBS Precious Metals ETN (JJP) and the iPath Pure Beta Precious Metals ETN (BLNG)—look much like DBP, solely holding futures contracts on gold and silver. The three funds all pick their futures contracts differently, but have generally performed nearly identically to each other.
The broader baskets are all fairly different. At the farthest extreme, the ETFS Physical White Metals Basket (WITE) doesn’t hold gold at all—it merely holds physical silver, platinum and palladium—making it a great addition to a portfolio that already has exposure to gold, but obviously not a great vehicle for exposure to gold itself.
One of the newest entrants to the space, the RBS Rogers Enhanced Precious Metals ETN (RGRP), holds a broad basket of the four metals, but uses futures contracts for its exposure. RGRP has done very well in its short life, though it’s too early to know whether its ability to outperform will continue.
The differences between the strategies can be severe. Over the past six months, WITE has returned 8 percent, compared with GLTR’s 2 percent and DBP’s -1 percent.
If you’re thinking about expanding your precious metals allocation from gold into a broader basket, the choices before you are simple. The first question is, quite simply, how much gold you want in your basket. DBP, JJP and BLNG make much larger allocations to gold than their more diverse peers:70-80 percent vs. 50 percent for GLTR and RGRP and 0 percent for WITE.
The second question is whether you want exposure to futures contracts or the physical metals themselves. The physical metals ETFs are cheaper than their futures-based counterparts and better indicators of spot prices, so are really the win-win situation here since they also provide the broadest coverage.
If you want a broad, diverse basket of precious metals, GLTR is the way to go (or WITE if you already own gold).
At the time this article was written, the author held no positions in the securities mentioned. Contact Carolyn Hill at firstname.lastname@example.org.
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