How to Invest in Gold, Silver ETFs

NEW YORK (TheStreet) -- Both bulls and bears have been flocking to precious metals ETFs such as the iShares Silver Trust(SLV Quote) and Market Vectors Gold Miners(GDX Quote) to exit currency holdings and fight inflation fears.

The list of silver and gold exchange-traded products continues to grow, and it has become increasingly important for investors to understand these different types of products as regulation shapes the industry.

No matter which way you think the market is headed, there are compelling reasons to gain exposure to gold. Bulls can use gold as protection against inflation, and in case the dollar weakens as the stock market surges. Bears can turn to gold to protect their capital against market downswings.

Silver, the more volatile of the two metals, tends to soak up the spill-over from its yellow counterpart. Silver may not always follow an upswing in gold, but high inflation fears will drive investors to both. In addition to currency protection, silver also has uses as an industrial metal.

As the Commodities Futures Trading Commission investigates the role that futures-based commodity funds have on the markets they track, investors need to be aware of which type of ETF they buy. Futures-based gold and silver funds could be profoundly affected by new position limits, while physical and equity-based funds are unfazed.

Physical ETFs

These funds track the value of gold by holding physical gold and silver in storage. As assets in the funds increase or decrease, fund managers will adjust their stocks of bullion accordingly. Physical gold ETFs also have a higher tax rate than many of their peers: they are taxed as collectibles, with a 28% percent long-term capital gains rate.