NEW YORK (
) -- The demand for "physical" commodity ETFs is exploding worldwide.
International fund issuer ETF Securities saw the biggest ever one-day influx of assets into
ETFS Physical Gold ETC
Tuesday in London. This ETC's bullion holdings increased by 7 percent Tuesday, or 211,500 ounces, to 3.190 million ounces.
In the U.S., investors use funds like
SPDR Gold Shares
iShares COMEX Gold Trust
to diversify and hedge against inflation.
Like other "physical" ETFs, GLD and IAU allow investors to gain exposure to the market for physical gold. Each has gold bullion to back its shares. The success of the ETF is dependent on how much people want to pay for physical gold.
ETF Securities has popularized these commodity funds abroad. The issuer launched five new funds on the Tokyo Stock Exchange earlier this week. The new ETFs are Physical Gold, Physical Silver, Physical Platinum, Physical Palladium and a Physical PM Basket ETF.
ETF Securities has also ventured into the U.S. market. On July 24, ETF Securities premiered the
ETFS Silver Trust
on the NYSE, offering investors exposure to physical silver. SIVR has yet to attract high volume, but is certainly a symbol to watch.
While hard data has yet to back rampant inflation fears, investors continue to protect their portfolio with inflation-fighting ETFs. Physical ETFs are popular in the U.S. and abroad while
Treasury Inflation Protection Securities
grow in demand. The
iShares TIPs ETF
is one of the top asset gatherers for the ETF giant in 2009.
Other issuers have picked up on this profitability and are beginning to capitalize on the fixed income space. PIMCO launched the
PIMCO 1-5 Year U.S. TIPS Index Fund
, the first of three planned TIPs ETFs on Monday. The
, expected to be fully released in September, could steal market share from TIP with its more focused approach.
Investor demand for inflation protection though "physical" and TIPs ETFs should continue to spur the release of new funds. Investors looking to get involved with the "physical" gold play are well served by IAU and GLD. While the latter has more trading volume, both are large liquid funds with essentially identical strategies.
The success of the ETF Securities funds abroad, along with its U.S. debut, suggests that more of these funds may be in the pipeline. The crackdown on futures-based commodity funds like
United States Natural Gas
United States Oil
could have people running from these funds to physical commodity ETFs like GLD and SIVR.
Physical commodity funds are a good way to diversify your holdings, but they shouldn't make up the core of your portfolio. The difference between buying gold bars and buying shares of GLD involves management fees that nibble away at your holdings. ETFs like IAU and GLD also have less favorable tax treatment than other ETFs.
Keep an eye out for the expansion of "physical" commodity ETFs and the opportunities they provide. The regulatory crackdown on futures-based ETFs and fears of inflation could spawn a new generation of funds.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion owns iShares COMEX Gold Trust and Treasury Inflation Protection Securities.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.