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2 ETFs for Precious Metal Diversification

NEW YORK ( TheStreet) - Throughout 2010, it has been hard to ignore the fanfare which has surrounded precious metals.

As investors seek sanctuary from the economic turmoil facing regions of the developed world, physical bullion- and miner-based gold ETFs such as iShares Gold Trust (IAU) and Market Vectors Gold Miners ETF (GDX) have generated a massive following, resulting in the yellow metal becoming a brand new asset class of its own.

Precious metal alternatives including silver, platinum and palladium have grown in popularity as well, indicated by the breakneck rally from iShares Silver Trust (SLV) and the massive expansions of the platinum and palladium funds sponsored by ETF Securities: ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL). Although PPLT and PALL are less than a year old, both boast over $500 million in assets.

Given the popularity and success of concentrated precious metals funds, it is not surprising that some ETF sponsors have sought to attract investors by launching products aimed at combining two or more of these precious metal baskets under one roof.

Two products which aim to achieve this goal are the PowerShares DB Precious Metals Fund (DBP) and ETFS Physical Precious Metals Basket Shares (GLTR).

DBP, the elder of the two precious metal basket funds, seeks to capture the combined strength of gold and silver. However, unlike IAU and iShares Silver Trust, the PowerShares option does not track a physical stockpile of the metals. Rather, the fund's index is comprised of precious metals futures contracts. Currently, the fund's breakdown is 80% gold and 20% silver.

While its investment strategy is appealing, when using DBP for their precious metal exposure investors face the same risks that are inherent in other futures-based products.

Limits set by the Commodities Futures Exchange Commission, for instance, threaten to interfere with DBP's performance by capping how many futures contracts the fund can hold at one time. This regulatory body's influence has been further strengthened this year with the passage of the Dodd-Frank financial reform bill.

Investors concerned about the regulatory headwinds associated with holding DBP would be better off opting for the industry newcomer, GLTR. Unlike the PowerShares option, GLTR is designed to track a physical stockpile of precious metals. Its index is also more diversified than DBP. On top of tracking gold and silver, this fund also sets aside room for platinum and palladium.

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