Barchart.com ETF Research
Barchart.com's picks for the Precious Metals ETF Sector ex-Gold -- Silver, Platinum and Palladium
ETF Research written by the Barchart.com ETF Research Team
Last updated: December 13, 2010
Table of Contents
In this report, we will analyze exchange-traded products in the precious metals sector, including precious metals baskets, silver, platinum and palladium. We will not analyze gold exchange-traded products in this report because we issued a separate report on gold ETFs. We will cover base metal ETFs in a future report.
DBP – PowerShares DB Precious Metals (web site link) – DBP, launched in January 2007, currently has about $380 million in assets under management. The fund tracks the Deutsche Bank Precious Metals Index (symbol DBLCYTPM), which uses the “Optimum Yield” methodology to try to mitigate the impact of contango and a negative roll yield (for an explanation of the contango and the futures roll yield please see our report “Commodity Exchange-Traded Product (ETP) Performance and the Importance of the Futures Curve and Contango).” The fund each November adjusts the base weights back to 80% in gold and 20% in silver, although the exact weights will then fluctuate during the year based on the relative movement of gold and silver prices. The fund has an expense fee of 0.75% and an estimated futures brokerage fee of 0.04%.
GLTR – ETFS Physical Precious Metals Basket Shares (web site link) – GLTR just recently launched in October 2010 but quickly acquired a substantial $130 million in assets under management by December 2010. The fund has an expense ratio of 0.60%. The fund assigns the following physical weights to four precious metals: 0.03 troy ounces of gold, 1.10 troy ounces of silver, 0.004 troy ounces of platinum, and 0.006 troy ounces of palladium. Based on precious metals prices on December 10, 2010, the weights in dollar-value terms are 49% for gold, 38% for silver, 8% for platinum, and 5% for palladium. The fund’s gold and silver is held in vaults in London and the platinum and palladium is held in vaults in either London or Zurich. The sponsor is ETF Securities USA LLC (see www.etfsecurities.com), which is an ETF firm that specializes in metals ETFs. The fund’s Custodian is JP Morgan Chase Bank. The fund has an expense ratio of 0.60%.
We will not discuss two precious metals exchange-traded products in detail here because their assets under management are currently too low for investment consideration: (1) iPath DJ-UBS Precious Metals TR (web site link) with assets under management of $24 million, and (2) WITE – ETFS White Metals Basket TR (web site link) with assets under management of $33 million.Precious Metals Basket ETFs Investment Conclusions – Our pick for a precious metals basket ETF is GLTR-ETFS Physical Precious Metals Basket Shares for the following reasons: (1) GLTR is backed by physical bullion and therefore closely tracks spot precious metals prices, as opposed to DBP, which is based on futures contracts and can therefore deviate substantially from spot prices due to the futures roll yield, (2) GLTR has an expense ratio of 0.60% that is lower than DBP’s 0.75%, and (3) GLTR is more evenly weighted between the metals than DBP and in addition holds platinum and palladium.
SLV – iShares Silver Trust (web site link) – The iShares Silver Trust (SLV), launched in April 2006, is the largest silver exchange-traded fund by far with $9.8 billion in assets under management. The fund holds 10,779 metric tons of silver in vaults in London. The sponsor of the fund is Blackrock Asset Management International Inc, the trustee is The Bank of New York Mellon, and the custodian is JP Morgan Chase Bank N.A., London branch. The fund’s expense fee is 0.50%.
SIVR – ETFS Physical Silver Shares (web site link) – SIVR, launched in July 2009, is an exchange-traded fund that has about $420 million in assets under management. SIVR holds silver bullion in a vault in London managed by the fund’s custodian, HSBC Bank USA N.A. The fund’s sponsor is ETF Securities. The fund has a gross expense ratio of 0.45% and a net expense ratio of 0.30%.
DBS – PowerShares DB Silver (web site link) – DBS, launched in January 2007, has about $180 million in assets. DBS is based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Silver Excess Return™ (Index). The management fee is 0.75% plus an estimated futures brokerage fee of 0.04%. DBS is an exchange-traded fund that holds silver futures contracts rather than silver bullion. DBS uses what Deusche Bank calls its “Optimum Yield”TM methodology for seeking to “minimize the effects of negative roll yield that may be experienced by conventional commodities indexes.”USV – UBS E-TRACS CMCI Silver TR ETN (web site link) – USV is an exchange-traded note that has only $6 million in assets under management. Due to the low level of assets, we do not advise consideration of this product.
Our choice in the silver ETF sector comes down to a comparison between SIVR-ETFS Physical Silver Shares and SLV-iShares Silver Trust because those are funds that are backed by physical silver and exactly match spot silver prices less expenses. We drop from consideration DBS – PowerShares DB Silver fund because it is tracks futures and its return can therefore deviate substantially from spot silver prices.Between SIVR and SLV, our choice is SIVR because its net expense fee of 0.35% is well below the 0.50% expense fee of SLV. SLV is the 800-pound gorilla in the sector with $9.8 billion in assets under management. However, SIVR has $420 million in assets under management, which is high enough to provide sufficient liquidity and staying power. In addition, we like SIVR because it holds its silver bullion in vaults in London and Zurich, which provides an attractive geographical diversification versus SIVR, which holds all of its silver bullion in London.
AGQ – ProShares Ultra Silver (web site link) – AGQ is an exchange-traded fund that seeks investment results, before fees and expenses, that corresponds to twice (200%) the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. AGQ currently has about $450 million in assets under management. AGQ gains its exposure to twice the silver price by holding over-the-counter silver forward contracts and silver futures. AGQ has a high expense ratio of 0.95%.
ZSL – ProShares UltraShort Silver (web site link) – ZSL is an exchanged-traded fund that seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund has about $70 million in assets under management. The fund gains its -2X exposure to silver by holding short over-the-counter silver forward contracts and silver futures contracts. ZSL has a high expense ratio of 0.95%.Investment Conclusions -- The ProShares leveraged and short silver ETFs suffer from several shortcomings in our view: (1) the funds hold over-the-counter forward contracts that present potentially significant counterparty risks, (2) the forward and futures contracts bring potential contango problems into the picture that may reduce the return of these ETFs relative to physical ETFs, and (3) both funds have high expense fees of 0.95%. Investors with margin and shorting capabilities in their brokerage accounts can obtain similar leverage and shorting effects as the ProShares products by simply buying a physical silver ETF on 50% margin (gaining 2X long exposure) or by shorting a physical silver ETF (gaining at least -1X short exposure).
PPLT – ETFS Physical Platinum Shares (web site link) – PPLT, launched in January 2010, quickly built assets under management to about $600 million by December 2010. PPLT is an exchange-traded fund that holds physical platinum bullion in plate and ingot form in vaults in London and Zurich. The Custodian for the physical platinum is JPMorgan Chase Bank, N.A. The fund’s sponsor is ETF Securities USA LLC. The fund’s management fee is 0.60%.
PGM – iPath DJ-UBS Platinum Total Return ETN (web site link) – PGM, launched in June 2008, has $80 million in assets under management. PGM, with its structure as an exchange-traded note, is an unsecured debt security backed by Barclays Bank PLC. PGM provides a return based on the Dow-Jones-UBS Platinum Subindex Total Return index. That index tracks futures contracts, which means that its return profile may deviate substantially from platinum spot prices. PGM has an expense fee of 0.75%.
Platinum ETF Investment Conclusion - In the platinum sector , we favor PPLT because (1) PPLT is backed by physical platinum whereas PGM is simply an unsecured debt security backed by Barclay’s bank, (2) PGM tracks an index based on futures, which means its return can deviate substantially from spot platinum prices, (3) PPLT’s expense ratio of 0.60% is lower than PGM’s expense rate of 0.75%, and (4) as of December 2010, PPLT outperformed PGM by several percentage points over the previous year.
Figure 1: Platinum ETP Comparison: PPLT vs PGM (live chart)
PALL – ETFS Physical Palladium Shares (web site link) – PALL , launched in January 2010, quickly built assets under management to about $720 million by December 2010. PALL is an exchange-traded fund that holds physical palladium bullion bars in vaults in London and Zurich. The Custodian for the physical platinum is JPMorgan Chase Bank, N.A. The fund’s sponsor is ETF Securities USA LLC. The fund’s expense fee is 0.60%.Palladium ETF Investment Conclusion – PALL is the only platinum exchange-traded product at this time. However, we like this product because it (1) is an exchange-traded product backed by the physical metal, (2) has a substantial amount of assets and good liquidity, and (3) has a reasonable expense fee of 0.60%.