Precious metals ETFs are investment vehicles that track the price of precious metals such as gold, silver, platinum, and palladium. They offer investors a convenient way to gain exposure to these assets, which are known for their stability and diversification benefits.
In this guide, we will explore some of the more popular precious metals ETFs available, their benefits and drawbacks, and how to choose the right one for your investment portfolio. We'll also explore the pros and cons of investing in ETFs versus owning physical gold you can hold.
There is a kind of derision when die-hard, or even regular, bullion investors use the term "paper gold". For reference, they're referring to the ETFs outlined below, along with things like futures contracts.
Bullion bulls not only see the derivatives market as not constituting real gold and silver investment: they believe it's being used to exert various kinds of manipulation on what should be a fairly straightforward commodities market.
And oftentimes, they're right.
On the flip side, we have the size and general importance of the paper market to take into account. We don't know what the precious metals market would look like without paper gold, but it would be a different one, with a lot less liquidity and volume.
Before going in-depth into both the list of the most popular funds and why some prefer to forgo them altogether, let's first cover the definition.
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What is a precious metals ETF?
Often compared to mutual funds, precious metals ETFs are a financial instrument that is in many ways akin to a basket of passively managed stocks that track an index. It's a derivative of something that should be tangible: in this case, each of the four precious metals and sometimes other commodities as well.
Instead of moving up and down with a certain stock market index, the precious metal ETFs are meant to track the price of gold and other metals in this category as closely as possible. And the top ones do it with very little deviation.
The profile of investors in precious metals ETFs is highly varied: large-cap investors supposedly prefer them to gold bullion, yet they're just as popular with smaller "everyday" investors.
It might be accurate to say that whoever doesn't have an issue with investing in stocks probably won't have issue owning shares of a precious metal ETF.
That's right: when investing in a precious metals ETF, you're really buying shares of the fund that issues it. You're trusting the precious metal, but you're placing even more faith in the fund's general prosperity, especially over a longer period of time.
Related: Paper Gold vs Physical Gold - Which Should You Buy?
How big of an issue this is may be debatable. Many of the funds on this list are considered more reputable and stable than any top stock or fund you could think of.
The paper gold market is regulated by, among other things, the Investment Company Act of 1940. And there is a very broad trend of going for the biggest and most known funds available, which are in turn issued via some of the biggest names in finance.
Still, to many bullion investors, that isn't enough. Precious metals they can't touch aren't precious metals, and the amount of counterparty risk involved is simply too much for many when a single gold bar can accomplish the same thing with no risk involved.
So long as you've secured it, that is. But more on that later. For now, let's focus on the funds behind the precious metal: the best and most-known indices that essentially power the paper gold market.
Best precious metal ETFs: standard underlying index
SPDR Gold Shares (GLD)
Is it too much to call the SPDR Gold Shares the gold standard of precious metals ETFs? Its reputation is such that the fund itself is oftentimes equated with gold itself, partly because of its alternative "moniker", GLD.
What does GLD have going for it? Well, funds are all about trust, and SPDR has plenty of it. As already mentioned, the fact that people often use this fund's name instead of the spot price when analyzing gold movements tells you plenty.
The fund itself is fairly massive, with over $60 billion in net asset value backed by allocated gold bars. If you have any experience with individual precious metals investment, you'll know that, when it comes to storage, allocated over unallocated storage can make all the difference in the world.
Allocated storage is more expensive, and being able to secure it for $60 billion of physical gold is enough for a lot of investors.
The fund has a lot of other things going for it. It's the largest fund overall, has a price deviation rate of less than 1% on an annual basis and boasts BNY Mellon as its trustee and HSBC as its custodian.
If you're interested in paper gold investment and don't already have something else lined up, this is probably what you'll go for.
iShares Silver Trust (SLV)
Also known as Blackrock's silver ETF, iShares bears a lot of resemblance to SPDR. There's the SLV moniker, though you might not see it used as often as you will that of GLD.
It has a big-name custodian in the form of JPMorgan Chase and, like SPDR, provides exposure entirely to silver by tracking spot price and backing its stock with silver bullion.
Having been on the market since 2006, it has almost two decades of smooth running behind it. How great this is relative to the precious metals market is, again, up to the investor.
For owners of silver bullion, 16 years isn't that big of a stretch to marvel over, and excessively doing so might make them remind you how feeble paper assets are.
The amount of silver it holds can vary depending on market conditions, amount of investors and so on, but is generally considerably lesser than that of GLD with a fund value of around $11 billion.
Aberdeen Standard Physical Platinum and Palladium ETFs
We've grouped these two together because of several reasons. Aberdeen Standard Physical Platinum Shares ETF is the top "pure" platinum fund, holding $1 billion in platinum bullion in vaults across Europe.
PPLT is another fund that boasts allocated storage for its holdings, which can become increasingly rare as we venture into the more exotic varieties.
Aberdeen Standard Physical Palladium Shares ETF is the smallest out of the four so far, having a fund valuation of $300 million. PALL's palladium assets are allocated, but like all ETFs, not deliverable.
What does that mean? Pretty simple: if you end up wanting the palladium bullion you've invested in, you'll have to sell shares of this fund and then purchase bullion from a third party.
A lack of physical delivery is a major downside for many who want to have the feeling of having truly invested in precious metals. Still, plenty of others won't be bothered by it and just want an accurate price tracker, which Aberdeen provides.
Both of the funds were launched in 2010 and both have BNY Mellon as their trustee and custodian. Both also mark our move away towards more exotic funds.
Everything below this point on our list isn't a fund whose price is covered by and tracks only the accompanying metal, but rather a more complex financial instrument.
Best precious metals ETFs: broader underlying index
Global Capital Cycles Fund
The VGPMX is a tale of both the precious metals market volatility and how quick those behind the curtains can be to act on it. Vanguard's fund in this sector used to be called the Vanguard Precious Metals and Mining Fund.
It was renamed some years ago when gold's price dropped by a bit. It now invests only a quarter of its $2.3 billion in value into the sector, and only that through miners.
What if you had money in this fund when the change happened and weren't satisfied with it? Well, as is often the case with funds, your only option would have been to liquidate.
Being one of the largest investment companies in the world, Vanguard is one of the top choices for everyone. But its lack of a real precious metals fund along with a willingness to change the investment trajectory however it sees fit outlines why ETF investments are not for everyone.
iShares MSCI Global Gold Miners ETF
If not Vanguard, then it's BlackRock, right? And their mining funds are more satisfactory than that of Vanguard. In the case of RING, you get a convenient way to track the growth of the gold mining sector through around 53 companies with a single investment.
Which companies and when? The top five holdings in this ETF include:
- Newmont Corporation (NEM)
- Barrick Gold Group (ABX.NE)
- Agnico Eagle Mines LTD (AEM.TO)
- Anglogold Ashanti LTD (ANG.JO)
- Newcrest Mining LTD (NCM.AX)
This fund is well-suited for those wanting to profit from mining companies without going through the hassle of picking out individual miners. On the other hand, if you're particular about your miners, tough.
iShares MSCI Global Silver & Metals Miners ETF
SLVP shares a lot of similarities with its gold cousin, along with some notable differences. The basket of miners is sizable, with around 32 names in the pool. The fund is issued by BlackRock and boasts a hefty valuation of $198 million.
Because silver doesn't really have silver mining companies in the same way that gold does, the miners that this fund invests in deal in other precious metals and even industrial metals.
So while the fund's performance tracks the price of silver somewhat well, it's really closer to a commodity fund than a silver investment vehicle. It might be accurate to call it the most precious-metals heavy commodity fund.
Why is the fund I want to invest in not on this list?
The cream of the crop should serve primarily as a reference point. In reality, funds are a dime a dozen. You might find a smaller or lesser-known fund that appeals to you more than the aforementioned behemoths for whatever reason: familiarity, accessibility…
There are some general rules that apply to all precious metals ETF investments. If they apply to the biggest and most regulated names in the sphere, you should be that much more careful when applying them to smaller companies.
As already mentioned, investing in an ETF is very similar to investing in a company on the stock market. The smaller it is, the less trust it normally commands. Here are some general things to watch out for…
- Who is the fund issued by?
- What does the portfolio look like, or rather, what provides the fund's backing?
- How accurately does the fund track the asset it's assigned to?
- What is the price of the fund's shares compared to competitors?
- What is the fund's annualized return over 1-year, 3-year and 5-year period?
The last point should be paid special attention to, as should details surrounding the fund such as year of inception.
If you're considering a precious metals ETF that isn't on the list above, due diligence and research are your best friends. Along with familiarizing yourself with some general risks associated with investing in paper over physical.
Physical bullion vs precious metals ETFs?
From a completely no-nonsense standpoint, one might rightly argue that nobody would invest in paper gold if convenience wasn't a factor. Sure, traders and so on.
But given the option, a gold bullion investor would prefer “gold you can hold” or gold that at the very least is eligible for physical delivery at some point.
Convenience is a pretty big factor, though, which is one of the main reasons people opt for paper gold investment over silver or gold bullion. There really aren't many benefits to precious metals ETF investment compared to bullion, and there are a lot of drawbacks.
Precious metals are supposed to be defined by a lack of counterparty risk, yet all you've really done by investing in a related fund is purchased stocks of a company.
That's the definition of counterparty risk. If you're considering a precious metals ETF, chances are you have some concerns over bullion investment such as…
- The lack of easily-accessible storage options
- The lack of an affordable insurance policy for the metals you've invested in
- The safety and security of your physical holdings
- A lack of familiarity with the good and the bad when it comes to product choices
Among other things, gold IRA companies exist to address all of these concerns and provide an alternative investments vehicle for bullion enthusiasts. When working with a reputable gold IRA company, your experience might mimic what you'd hope for in a precious metals ETF.
Some gold IRA companies to consider looking into:
You will have purchased real bullion of your own choosing, stored it in a depository relatively close to home and become privy to all the benefits of precious metals investment.
The bullion in your IRA is eligible for physical delivery in the sense that you can take distribution or the metals can be liquidated at any time. You'll not only benefit from spot movements in the price of your precious metals, but also various increases in premiums on the physical market.
To top it off, while gold IRA companies don't formally offer investment advice, the good ones will assign a sales representative to you that will act as a personal portfolio manager of sorts.
All in all, the best precious metals ETFs offer an easy way for your portfolio to gain exposure to the performance of the physical metal. It's a smart option for some, but there are alternatives to consider for anyone who'd like easy precious metals investment with little to no hassle involved.
Whether you decide to invest via a gold IRA or a precious metals ETF, it’s a smart idea to first discuss with your financial advisor. A trusted investment adviser familiar with your goals and investment objectives can guide you through the best and most cost effective options to invest in gold and other precious metals.
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