With the central bank easing again in what is being termed QE3, investors are beginning to reconsider some of the holdings. After all, with rates apparently poised to stay at underwhelming levels for at least the next three years, it doesn’t make much sense to push into bonds and especially low yielding short-term Treasury securities.
This trend has made stocks, and particularly precious metals, more attractive investments as fears over inflation and a move away from low yields are causing investors to continue to sell off their bond holdings. This has been especially true in the gold market, as the price of the yellow metal saw an immediate boost after the announcement of QE3 suggesting that some investors are ready to make a bet on precious metals once more (see Precious Metals ETFs 101).
As always, precious metal investors are focusing in on gold for their exposure in the space as the metal remains the most popular for those seeking hard asset holdings. In addition to being the most talked about metal, the product is also the least used from an industrial perspective, a factor that makes gold an easy choice for some investors seeking an inflation hedge in today’s easy money environment.
Still, this strategy suggests that many investors are likely heavily concentrated in gold while having little—if any—holdings in the ‘white’ precious metals of platinum, palladium, and silver. This can be potentially troubling in this market environment, as gold has actually been the worst performing of the four in the third quarter of 2012 while the yellow metal has only beaten out one of its precious metal counterparts (palladium) from a year-to-date look.
While it is true that gold has greatly outperformed over the trailing one year period, it is pretty clear that some diversification in the metals market can help to improve overall investor returns in the space. Since many investors already have gold bullion or gold ETFs like (GLD - ETF report) , (IAU - ETF report) , or (SGOL - ETF report) in their portfolios, a look solely at the ‘white metals’ could be the way to go (see Gold ETFs: Why Bid Ask Spreads Matter).
Investors can certainly buy up any of the three metals in bullion form but an ETF approach can also be taken as well. In this segment, ETF investors can look to any number of physically-backed or futures-based ETFs that offer exposure to silver, platinum, or palladium.
Beyond these individual ETFs, there is also a relatively new choice which invests in all three of the white metals in a single basket. This product, the ETF Securities White Metal Basket Share could thus potentially be a great way to balance precious metal exposure without doubling down on gold (read Zacks #1 Ranked Silver ETFs).
WITE in Focus
This ETF charges investors roughly 60 basis points a year for its services of holding bars of silver, palladium, and platinum in secure vaults in Europe. The trust uses the LBMA and LPPM’s rules for Good Delivery and the metals are inspected twice a year in order to give investors peace of mind over their precious metal investment.
In terms of individual metal exposure, the product definitely has a tilt towards silver, although platinum and palladium make up double digit allocations as well. At the time of the last fact sheet, the ETF was roughly 60% in silver, 29% in platinum, and 11% in palladium. This translates into just under one ounce of silver, .0010 ounces of platinum, and .008 ounces of palladium for each share of WITE (see Platinum ETF Investing 101).
With this focus, silver clearly drives the return of the overall fund, although the more expensive metals also have their place as well. Still, it could provide a nice diversifier for investors looking for more precious metal exposure without the continued heavy influence of gold.
In fact, in the one month, QTD, and YTD time periods, WITE has easily outperformed the major gold ETFs on the market. However, the product has underperformed gold ETFs in the trailing one year period, although the relatively balanced approach has helped it to outperform at least one of the white metals no matter what in all of the time frames studied (see The Five Best ETFs over the Past Five Years).
Thanks to this, WITE can be considered a very interesting compliment for the many investors who already have gold—in some form—in their portfolios. While the product may be a bit concentrated in silver, it still provides reasonably diversified exposure across the three white metals of silver, platinum, and palladium, suggesting that it could be a solid physically-backed ETF pick to round out precious metal holdings for those that are concerned about QE and its eventual impact on inflation.
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Author is long IAU and gold/silver bullion.