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Commodity ETFs

The rapid expansion of the ETF industry over the past few years has greatly increased the options available to investors seeking to drill down in their sector of choice. Funds now exists that allow investors to buy up products targeting corners of the market as obscure as the fishing industry or solid state drives, with pretty much everything in between covered as well. While a number of these niche spaces have failed to gain traction among many investors, this has certainly not been the case in one corner of the ETF world; the precious metal mining ETF space (see Is USCI The Best Commodity ETF?).

The sector has seen close to $3.5 billion in net inflows over the past year alone as precious metal prices have surged, leading many investors to believe that a similar spike was due in the equity side as well. Unfortunately, this has not been the case as a broad sell-off of risky assets-- including precious metal mining firms-- hit the space hard, pushing heavy losses to companies across the board. Given that many of the industries have favorable Zacks Industry Ranks, and that many of the companies have relatively favorable ratings in terms of their Zacks Rank as well, one has to believe that this could change in the near future, especially if precious metal prices remain elevated. In light of this, we take a look at three of the best precious metal mining ETFs that investors have to choose from today, highlighting funds that focus on each of the three major precious metals; gold, silver, and platinum:

Global X Silver Miners ETF (SIL)

Silver is an increasingly popular metal for investors as the product has a variety of uses beyond its traditional role as a hedge against monetary debasement. The metal finds its way into a number of products ranging from coins and jewelry, to electronic wiring, medical applications, and solar energy production. For investors seeking a targeted play on this increasingly important sector and the companies that mine the metal, SIL is a quality choice. The fund tracks the Solactive Global Silver Miners Index, which is a broad based equity market performance of global companies involved in the silver mining industry, as defined by Structured Solutions AG (read CPER: A Better Copper ETF?).

SIL is relatively focused in its top holdings, putting close to 75% of all assets in its top ten. Additionally, three companies make up at least 11.5% of total assets further suggesting that a high level of concentration exists in this fund which only consists of just over 30 securities in total. Nevertheless, the product does do a good job of spreading assets across market cap levels, allocating just 41% to large caps, 30% to mid caps, and the rest to small and micro sized securities. However, unlike the other products on the list, SIL is an extremely popular precious metal mining ETF, trading about 660,000 shares a day. This should help to cut down on the spread between the bid and the ask and keep total costs low for those seeking to make a play in the space. Unfortunately, gains haven’t exactly been easy to come by in this fund, as SIL has slumped by about 20% on the year, a poor performance compared to SLV’s 3.6% gain in the same time period (read The Two Best Silver ETFs For The Next Silver Bull Market).

First Trust ISE Global Platinum Index Fund (PLTM)

For investors seeking a play on the priciest of all precious metals, and a crucial component in catalytic converter production, First Trust’s PLTM could be the way to go. The product tracks the ISE Global Platinum Index which is designed to provide a benchmark for investors interested in tracking public companies that are active in platinum group metals mining based on revenue analysis of those companies. PGMs include platinum, palladium, osmium, iridium, ruthenium and rhodium. In other words, companies included in the index must be actively engaged in some aspect of platinum group metal mining such as pulling the metals out of the ground, refining, or exploration. Interestingly, the fund also uses a unique methodology to develop weightings based on revenue exposure to PGM production. The component securities are grouped into linearly weighted quartiles and then equally weighted within each quartile. The resulting distribution allows smaller, more PGM focused companies to be adequately represented in the index.

In total, 24 securities make up PLTM with nearly 11% going towards Johnson Matthey (JMPLY), 8.3% to both Anglo Platinum (AGPPY) and Impala Platinum Holdings (IMPUY). It should also be noted that the product has a low median market cap of just $568 million, although the range is quite wide going from $80 million all the way up to $37.3 billion. In terms of fund metrics, they are quite favorable for this upstart product as the P/E is below 10 and the Price/Book ratio is below 1.4, suggesting reasonable levels of value on both measures. However, this could just be due to the fund’s horrendous performance so far in 2011, as the product has declined by more than 47% since the start of the year (see The Best ETF For The Next Decade).

Global X Pure Gold Miners ETF (GGGG)

Gold is arguably the most important metal of the group from a market perception standpoint, as the yellow metal tends to rise along with market fears and slump when investors are confident in the global economy. This has been extremely important lately as the global economic situation continues to crumble, although a stronger dollar can dull gold’s shine in these environments. For investors seeking to make a play on the space, most tend to gravitate towards one of Van Eck’s ultra-popular products in the sector; GDX and GDXJ. Although Van Eck’s Gold Miners ETF and its pint sized counterpart the MarketVectors Junior Gold Miners ETF , steal the show in terms of assets, a new fund from Global X could actually be a better choice for many investors. This fund tracks the Solactive Global Pure Gold Miners Index, which is a benchmark that only includes securities that get at least 90% of their revenues from gold mining.

While this might seem like a minor distinction, this gives the fund a vastly different holdings list than the other securities in the space. In fact, three of the biggest components in GDX, Barrick Gold Corp (ABX - Analyst Report), Goldcorp (GG - Analyst Report), and Newmont Mining (NEM - Analyst Report) are nowhere to be found in GGGG at all. Additionally, a few other names that are in GDX but are focused on the silver industry such as Pan American Silver Corp (PAAS - Snapshot Report) and Silver Wheaton Corp (SLW - Snapshot Report), are decent sized components in GDX but are not in the Global X product. Instead, GGGG focuses in on smaller companies that specialize in gold, potentially giving the fund better correlation with the spot price of the precious metal. While this may (or may not) be true, investors should also note that the product isn’t exactly the most popular, trading less than 10,000 shares a day. This suggests that bid/ask spreads could be quite wide and that it may be difficult to get into this precious metal mining ETF at a good price. Furthermore, thanks to the smaller cap nature of the fund, it has outperformed its larger cap focused counterparts, slumping by about 11.7% in year-to-date terms (see Why Aren’t Gold Stocks Rising With The Price of Gold?).

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