A Guide to Gold, Silver, Platinum and Palladium ETFs and ETNs

Gold ETFs and ETNs

Unleveraged Gold ETFs and ETNs

• E-TRACS UBS Bloomberg CMCI Gold Total Return ETN (UBG)
• ETFS Physical Swiss Gold ETF (SGOL)
• iShares COMEX Gold Trust ETF (IAU)
• PowerShares DB Gold Fund ETF (DGL)
• streetTRACKS Gold Shares ETF (GLD)

Leveraged Long Gold ETFs and ETNs

• DB Gold Double Long ETN (DGP)
• ProShares Ultra Gold ETF (UGL)

Short and Leveraged-short Gold ETFs and ETNs

• DB Gold Short ETN (DGZ)
• DB Gold Double Short ETN (DZZ)
• ProShares UltraShort Gold ETF (GLL)

Silver ETFs and ETNs

Unleveraged Silver ETFs and ETNs

• E-TRACS UBS Bloomberg CMCI Silver Index ETN (USV)
• ETFS Physical Silver Shares ETF (SIVR)
• iShares Silver Trust ETF (SLV)
• PowerShares DB Silver Fund ETF (DBS)

Leveraged Long Silver ETFs and ETNs

• ProShares Ultra Silver ETF (AGQ)

Short and Leveraged-short Silver ETFs and ETNs

• ProShares UltraShort Silver ETF (ZSL)

Platinum ETFs and ETNs

Unleveraged Platinum ETFs and ETNs

• E-TRACS UBS Long Platinum ETN (PTM)
• ETFS Physical Platinum Shares (PPLT)
  
• iPath DJ AIG Platinum TR Sub-Index ETN (PGM)

Short Platinum ETFs and ETNs

• E-TRACS UBS Short Platinum ETN (PTD)

Palladium ETFs and ETNs

• ETFS Physical Palladium Shares (PALL)

Mixed Precious Metals ETFs and ETNs

Unleveraged Mixed Precious Metals ETFs and ETNs

• PowerShares DB Precious Metals Fund ETF (DBP)
• PowerShares Global Gold & Precious Metals ETF (PSAU)

Mining Stock ETFs and ETNs

Unleveraged Mining Stock ETFs and ETNs

• Market Vectors Gold Miners ETF(GDX)
• Van Eck Junior Gold Miners ETF (GDXJ)

What Are They?

• The unleveraged metals ETFs (exchange traded funds) attempt to track the price of the metal by holding the actual commodity in storage, or by purchasing futures contracts. Because futures provide leverage (more exposure than the actual cash invested), ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.
• The ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with the price of the commodity. In other words, with the ETN you don’t actually own the metal, but a promissory note to pay you based on the metal’s price. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
• The leveraged long ETFs and ETNs provide super-charged exposure to the metal: if the goes up 3%, the leveraged ETF may rise 6% (and vica versa).
• The short and leveraged-short ETFs and ETNs are a way to bet against the metal price: if the price falls, the short or leveraged short ETF or ETN rises, and vica versa.
• The Mining Stock ETFs don’t track the metals. Instead, they are a basket of mining stocks. Since gold and silver mining stocks are strongly impacted by the price of the metals, they are another way to gain exposure to the metals. However, mining stocks are also impacted by costs for extraction, such as energy costs, and political and execution risk.

Why & How To Use Them

• Gold, silver and platinum are a separate asset class from stocks and bonds, so they provide extra diversification in a portfolio.
• The case for precious metals: Many people believe that precious metals are the best hedge against inflation.
• The case against precious metals: In contrast to stocks and bonds, metals are not income generating. So ownership of the ETFs or ETNs is a pure bet on prices. And the expenses charged by the ETF and ETN providers, including the cost of storing and insuring the metals or managing the futures, eat away at the underlying value of the fund. Morever, in the past, gold and silver underperformed the stock and bond markets for extended periods.

What to Look Out For

• Long ETFs that use futures have diverged significantly from the price of the metals themselves. ETNs, in contrast, track the price of the metal closely. See the articles in the Further Reading section below.
• There are dramatic differences in structure of the long ETFs and ETNs, even for the same metal, leading to potential differences in performance and tax treatment.
• Leveraged ETFs and ETNs are far riskier than simple long ETFs and ETNs. Their performance is often not what investors expect – see under Further Reading below.
• ETFs and ETNs are treated differently for taxation purposes. Current opinion is that all gains on ETNs held for longer than one year are treated as long-term capital gains, whereas an investor owning a futures-based ETF is taxed on any capital gains on the underlying futures held by the fund using the taxation convention for futures, ie. at a hybrid rate of 60% long-term, 40% short-term each year on all gains, even if the investor doesn't sell the fund. (Check this carefully with your accountant.)

Further Reading

• The underperformance of futures-based commodity ETFs relative to the actual commodity they are supposed to track, known as tracking error, is discussed in US Oil Fund ETF Fails Investors Consistently (Scott Rothbort). For the case for commodity ETNs over commodity ETFs, see Troubled By ETF Tracking Failures? Try ETNs (Richard Shaw) and Kevin Rich on Commodity ETFs and ETNs (Hard Assets Investor). See also The ETN Market Heats Up With Goldman Launch; More On the Way (Matt Hougan).
• For analysis and discussion of the gold ETFs and ETNs, see: (Index Universe), Beyond GLD: Four Alternative Gold ETFs (Michael Johnston) and Not All Gold ETFs Are Created Equal (Michael Johnston).
• For analysis and discussion of the other metals ETFs, see: UBS Platinum ETNs Step into the On-Deck Circle (Heather Bell), ELEMENTS Expands ETN Offerings to Livestock, Precious Metals, Climate Change (Heather Bell).
• On the taxation of gold and silver ETFs, see Tax Time With Precious Metals ETFs: What You Should Know (Tom Lydon).

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.

Comments

[mbkelly75]

I prefer the Closed End Fund (Central Fund of Canada - ticker symbol CEF) to the Gold and Silver ETFs or ETNs. They are clear, transparent and let you keep a balanced portion of both Gold and Silver Bullion in one security. They even pay a small, annual dividend instead of charging you a holding fee for the bullion. If you just want Gold, the same people have GTU and it is run the same way.
I thank you for your work on this guide. I have been thinking about GDX and your suggestions for more study are very helpful. It is also good to see the difference between ETFs and ETNs pointed out. So many places do not seem to know there is a difference. Good work.

2009 Nov 18 08:12 AM

[Reynold]

Gold ETFs like GLD are taxed at the 28% "collectibles" rate, even if you hold long term.

The Central GoldTrust of Canada (CEF) is structured as a gold holding trust. It holds audited physical gold in bank vaults. It does not promise to make physical distributions of gold under certain circumstances, as GLD does. Therefore it is not a "collectible". It qualifies as a Passive Foreign Investment Company with the IRS. You can therefore make a Qualified Electing Fund election by filing form 8621, a simple 1-page form. This allows you to receive standard capital gains treatment (15% long-term).

Many investors hold gold ETF's in an IRA to escape the onerous taxation. With CEF you can hold some gold in a regular brokerage account without getting killed at tax time.

Also, the auditing is much more transparent than that of GLD.

2009 Nov 18 11:17 AM

[Paco6945]

Excellent summary and explanation of the various methods of owning precious metals.

2009 Nov 18 11:28 AM

[Lisa]

Disadvantages of the Central Fund of Canada (CEF):
- it's a closed-end fund, so you can find that you've bought it at a premium to net asset value.
- it has far lower trading volume than GLD, so that means it can be hard to get in and out and the buy-sell spread is far wider than for GLD.
- because it holds a combination of gold and silver, it's harder to know what the actual asset value is.
- The annual expense ratio is higher than for the ETFs.
- If they pay you a dividend, it has to come from somewhere (the assets in the fund) because gold doesn't generate income.

2009 Nov 18 02:49 PM

[mbkelly75]

You can buy it at a premium or you can buy it at a discount. Even buying at a premium - I have made a lot of money here as they keep going up with the price of both Silver and Gold. BTW - they publish the NAV right on their webpage and tell you the actual premium or discount - it is not hidden and you do not have to go through the balance sheet to find it. The dividend is VERY small (0.07%) and comes from re-balancing done when the price of Gold and Silver move in such a way that they get too far from their 50-50 balance. I made good money simply from that myself - trading on the Ratio - I know that they are sharp enough to do the same thing.
Let's talk about their annual expense ratio: They have no management fee at all - it is 0.00% and there is 0.38% listed under "other expenses" - that 0.38% is the entire expense. GLD has a management fee of 0.40% and an expense fee of 0.40% - given this comparison - who has the higher expense ratio?????
You do have one point - GLD has 15X the average volume of trade than CEF does. However CEF is a Closed End Fund and trades just like any other stock. You do not have the problems getting in or out that you might get from a mutual fund that only trades at the end of the trading day.
As Renold said above - CEF also gives a tax advantage over GLD - it is taxed at 15% instead of GLD's 28%. Make your own choices - I think you are mistaken here.

On Nov 18 02:49 PM Lisa wrote:

> Disadvantages of the Central Fund of Canada (CEF):
> - it's a closed-end fund, so you can find that you've bought it at
> a premium to net asset value.
> - it has far lower trading volume than GLD, so that means it can
> be hard to get in and out and the buy-sell spread is far wider than
> for GLD.
> - because it holds a combination of gold and silver, it's harder
> to know what the actual asset value is.
> - The annual expense ratio is higher than for the ETFs.
> - If they pay you a dividend, it has to come from somewhere (the
> assets in the fund) because gold doesn't generate income.

2009 Nov 18 04:15 PM

[Lisa]

Good discussion - I'm now following you!

- I'm not sure why you'd want a fund that rebalances between gold and silver. Why not just buy the two ETFs and let them run?
- Mutual funds, due to their open ended structure, allow you to buy as much as you want (after market close) with no buy-sell spread. The problem with a lightly traded closed-end fund like (CEF) is that the spread can really hit you.
- Even if you made money on CEF after buying it at a premium, that's not an argument that buying at a premium is OK. You could have made *more* money had you bought at net asset value. The ETFs guarantee that.

On Nov 18 04:15 PM mbkelly75 wrote:

> You can buy it at a premium or you can buy it at a discount. Even
> buying at a premium - I have made a lot of money here as they keep
> going up with the price of both Silver and Gold. BTW - they publish
> the NAV right on their webpage and tell you the actual premium or
> discount - it is not hidden and you do not have to go through the
> balance sheet to find it. The dividend is VERY small (0.07%) and
> comes from re-balancing done when the price of Gold and Silver move
> in such a way that they get too far from their 50-50 balance. I made
> good money simply from that myself - trading on the Ratio - I know
> that they are sharp enough to do the same thing.
> Let's talk about their annual expense ratio: They have no management
> fee at all - it is 0.00% and there is 0.38% listed under "other expenses"
> - that 0.38% is the entire expense. GLD has a management fee of 0.40%
> and an expense fee of 0.40% - given this comparison - who has the
> higher expense ratio?????
> You do have one point - GLD has 15X the average volume of trade than
> CEF does. However CEF is a Closed End Fund and trades just like any
> other stock. You do not have the problems getting in or out that
> you might get from a mutual fund that only trades at the end of the
> trading day.
> As Renold said above - CEF also gives a tax advantage over GLD -
> it is taxed at 15% instead of GLD's 28%. Make your own choices -
> I think you are mistaken here.
>
> On Nov 18 02:49 PM Lisa wrote:

2009 Nov 18 05:10 PM

[mbkelly75]

Good questions, Lisa! I used to make money trading the ratio between Gold and Silver. CEF does it for me so I only have 1 commission to pay - 2 ETFs would be 2 commissions plus more commissions from trading the Ratio. CEF is much easier and, in that regard, much less expensive.
The spread is like the spread in any small or medium cap stock - just a normal part of the business. As far as the premium goes - CEF is very clear and transparent - openly guaranteeing that they will have a minimum of 90% Bullion at any time GLD and SLV are not nearly that clear and I am never sure that they actually have what they claim to have. CEF is just safer. That 13% tax rate difference is important also and is another reason for having CEF long-term instead of trading the ratio with ETFs and having short-term taxes.


On Nov 18 05:10 PM Lisa wrote:

> Good discussion - I'm now following you!
>
> - I'm not sure why you'd want a fund that rebalances between gold
> and silver. Why not just buy the two ETFs and let them run?
> - Mutual funds, due to their open ended structure, allow you to buy
> as much as you want (after market close) with no buy-sell spread.
> The problem with a lightly traded closed-end fund like (CEF) is that
> the spread can really hit you.
> - Even if you made money on CEF after buying it at a premium, that's
> not an argument that buying at a premium is OK. You could have made
> *more* money had you bought at net asset value. The ETFs guarantee
> that.
>
> On Nov 18 04:15 PM mbkelly75 wrote:

2009 Nov 18 07:18 PM