Metals ETFs Are the Place to Be

10/07/2009 12:00 pm EST

Focus: ETFS

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Richard Lehmann, editor of ISA ETF Advisor, says precious metals funds have been among the best performers, and he particularly likes some that use leverage.

[September’s best performing exchange traded funds] were concentrated in real assets.

The best performer was the PowerShares Global Coal Portfolio (Nasdaq: PKOL) up 29.9% for the month. The rest of the top performers were all concentrated in precious metals. The best performer here was Market Vectors Gold Miners (NYSEArca: GDX), up 17.55%. This fund invests in the stock of companies involved in gold mining.

[Among leveraged funds], the ProShares Ultra Silver ETF (NYSEArca: AGQ) was up a whopping 52.24%, while the Proshares Ultra Gold (see below) was up a more modest 28.21%.

The E-TRACS UBS Bloomberg CMCI Silver ETN (NYSEArca: USV), up17.47% [in September,] invests in silver futures. The only other top performer that was not precious metals was the ING Clarion Global Real Estate Income Fund (NYSE: IGR), up 13.22%. The best performers list reflects anticipation of inflation in that they represent real assets.

We have been recommending anti-inflation investments for the past few months, and they all increased in value. Of course, so has the rest of the market, with different sectors remaining highly correlated with the market in general. The differentiation may come later this year or early next year. Assuming the market anticipates trends by six months, it may be that long before it becomes evident.

The best gainers this month and in some previous months have been in the precious metal sector, and we see this trend continuing. We recommend getting involved in the gold sector, as this is a principal store of value.

Investing in gold can be accomplished in a variety of ways—buying the metal, the companies that produce it, or a paper representation of gold. The metal has problems of storage and high commissions, while the gold companies are susceptible to economic and political risks, not related to the price of gold.

The largest gold ETF, SPDR Gold Shares (NYSEArca: GLD), buys and stores gold for the investor, with a low expense ratio of 0.4%. The other alternative is participating in the gold market by way of the futures market. The ProShares Ultra Gold (NYSEArca: UGL) ETF does this approach one better by investing in such a way as to double the performance of gold bullion as measured by the US Dollar P.M. fixing price for delivery in London. The fund is currently trading [above $40].

The popular leveraged funds saw a net outflow during the last month, probably connected to bad press regarding their suitability for long-term investments. Leveraged funds that drop 50% must gain 100% to return to the starting point. Over time, this disparity leads to tracking error. While Ultras may not be suitable as long-term investments, they are useful as hedges and for short-term market moves.

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