Protect Against QE With These Precious Metal ETFs (GLTR, JJP, DBP)

Eric Dutram: At this point in time, it seems unquestionable that the Federal Reserve thinks that the economy is incapable of growth without more simulative measures. Due to this, the central bank recently announced a third round of quantitative easing, this time seeking to establish a new floor in the MBS market with $40 billion in purchases each month.

Beyond this, Bernanke also announced that low rates are likely to be here for a bit longer, as he extended the ZIRP language out to mid-2015, at least. If this wasn’t enough, Japan also announced an expansion of their QE program as well, suggesting a ‘race to the bottom’ in terms of central banks and their easing policies.

With these types of plans, some are worried that we could be in for a bout of inflation in short order. Luckily, a true inflation scare could be at least a little ways off as the sluggish growth prospects are likely to keep a lid on price increases in the near term (also seeCan You Fight Inflation with this Real Return ETF?).

Yet, with that being said, investors have already started to see an increase in both prices and interest in the precious metals market. These real assets—like gold, platinum, silver, and palladium—cannot be printed and are often seen as a hedge against currency debasement as a result.

Given the flood of cash being pushed onto the market by central banks around the world, these worries over currency declines are becoming louder and could spark more interest in precious metals as a result.

This suggests that we could be at the start of a new bull market for precious metal ETFs, so long as the Fed and other central banks keep up their money printing ways, and all signs are pointing to a continuation of this important trend for at least the next few years (watch Precious Metal ETFs 101).

However, while precious metals may be an interesting play in this environment, it is always hard to say which will be the biggest beneficiary from the shift. After all, each of the four precious metals have their own uses and volatility levels, suggesting that it could be tough to choose among the group for outperformance at this uncertain juncture.

Fortunately, there are a few ETFs out there that can provide exposure to multiple products in the precious metal space. This diversified approach can potentially spread risk around and help investors who may have otherwise been too focused in on a single one—like gold– for their precious metal exposure.

With this backdrop, we have highlighted below three ETFs that look to give investors exposure to multiple metals in the important sector. While any of the three could provide a hedge against further easing from the Fed, there are some key differences between the group which investors should definitely be aware of before picking the right one for their portfolio:

PowerShares DB Precious Metals Fund (NYSEARCA:DBP)

PowerShares entrant in the precious metals space is the futures-tracking DBP. The ETF utilizes futures contracts in both gold and silver to achieve its exposure, tracking the db Liquid Commodity Index-Optimum Yield Precious Metals Index.

For this, investors pay 79 basis points a year in fees, although trading volumes are pretty good at just under 100,000 per day. This, along with the solid AUM of $350 million produces tight bid ask spreads suggesting that total costs won’t be much higher than the 79 basis point level.

Investors should also note that the ETF is heavily tilted towards gold over its less expensive counterpart. Gold futures account for nearly three-fourths of the assets, leaving just one-fourth for silver (see Gold ETFs: Why Bid Ask Spreads Matter).

iPath Dow Jones-UBS Precious Metals ETN (NYSEARCA:JJP)

For investors seeking an Exchange-Traded Note to play the segment, JJP could be a great choice. JJP also focuses on gold and silver futures with gold contracts accounting for roughly 70% of the portfolio and silver the rest.

The product charges a slightly lower expense ratio than DBP, coming in at 75 basis points a year. However, the volume and AUM for this note are far less, as average volume is just 4,000 shares a day suggesting relatively wide bid ask spreads.

It should also be pointed out that since JJP is an ETN, it will not have any tracking error and it will not hold any actual securities in the portfolio. Instead, investors should consider JJP as an unsubordinated debt security from Barclays which seeks to pay out a return equal to that seen in the Dow-Jones UBS Precious Metals Index (read ETFs vs. ETNs: What’s The Difference?).

This means that if Barclays goes belly-up, investors in JJP might not be made whole, so it is a factor to consider but is likely to be a minor one overall. Still, the product could be a solid choice for gold and silver exposure while also reducing tracking error and the risk that comes from constantly buying and selling futures contracts on the open market.

ETFS Physical Precious Metals Basket Shares (NYSEARCA:GLTR)

The cheapest ETF on the list is also the only physically-backed one, ETF Securities’ GLTR. The fund charges a paltry 60 basis points a year in fees while possessing over $200 million in AUM.

The product is also the only one to hold all four of the precious metals, allocating some assets to palladium and platinum in addition to the more traditional gold and silver. This potentially creates a more diversified basket and also offers up a more comprehensive choice in the precious metal market to ETF investors.

After all, although GLTR does include platinum and palladium, these two only account, combined, for 11% of the assets. Instead, gold makes up slightly more than half of the basket while silver accounts for another 37%.

This suggests that GLTR is also, despite its inclusion of more ‘white’ metals, heavily focused on gold and silver. Additionally, investors should note that the product doesn’t have the most trading volume—just 10,000 shares a day on average—so bid ask spreads could be relatively wide for this fund (also see Platinum ETF Investing 101).

Still, GLTR represents the only fund out there in the ETF world that offers exposure to all four of the precious metals in physically-backed form. Lastly, with its cheap expense ratio and lack of worries over the futures curve, it could potentially make for an interesting choice despite some of its drawbacks.

Either way, no matter which ETF investors choose in this space, any of the three outlined above are likely to protect against inflation and currency debasement brought about by more QE.

For this reason, investors should definitely think about adding GLTR, JJP, or DBP if they are looking for an easy way to tap into multiple precious metals in a single ticker as a way to stave off some of the negative effects from more QE in the market.

Written By Eric Dutram From Zacks Investment Research  

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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