Investing in an ETF over a precious metals mutual fund may end up saving you money over longer periods of time due to management expenses.
Risk. You can’t think about making big profits in the volatile resource sector without considering risk. Making the right buys here can lead to big profits, as well as a hedge against inflation. But conservative investors may have a greater interest in a precious metals mutual fund or ETF to reduce some of the risks.
There are obvious caveats to investing in riskier sectors. Conservative investors should only dedicate a small percentage of their portfolio to precious metals because of the greater risk levels. For aggressive investors, it’s okay to dedicate a larger portion of your portfolio to resources, but stay smart and avoid holding too many resource stocks.
Investing in precious metals through stocks, mutual funds, and ETFs
Some investors will directly target individual stocks of companies that mine for or sell precious metals. But to profit, you need to understand the company well, including its historical performance, the areas it operates in, and the current status of its production.
If you want to invest in precious metals without taking such a big risk, target a precious metals mutual fund or ETF instead of investing directly into a mining company. Most mutual funds or ETFs will have less volatility and more diversification. Both mutual funds and ETFs include numerous holdings. Some actively managed mutual funds invest in a portfolio of equities and investments selected by the fund manager based on the fund’s stated strategy, while most ETFs are more passively managed and hold a basket of stocks that follow a specific index. Since mutual funds and ETFs both include multiple holdings, they are more diversified than individual mining stocks. This can help decrease the overall risk of these resource investments.
There are still differences to understand between mutual funds and ETFs.
Investing in a precious metals mutual fund may end up being more costly than comparable ETFs
Many mutual funds are actively managed investments, while most traditional ETFs are passively managed. This makes a significant difference, especially in the cost to investors. Mutual funds generally have a higher management expense ratio (MER) than ETFs, making mutual funds more expensive to hold.
The lower management fees of ETFs can make it less costly to buy ETFs over mutual funds. However, it is important to select the precious metals ETFs that actually have lower MERs than a comparable fund. Some newer ETFs come with higher MERs, which rival the rates associated with mutual funds. To get the most out of your ETF investing, make sure you choose ETFs with low MERs, strong diversification, high liquidity, and operation within stable locations.
An example of a precious metals ETF that has strong diversification throughout the global economy is the iShares MSCI Global Gold Miners Index ETF (Ring). This is one option for a passively-managed investment with lower management fees that focuses on the gold mining market. Global X Silver Miners ETF (SIL) is similar in its global diversification, but it follows the silver mining industry. And both offer expense ratios below those of comparable mutual funds.
Understand the best kind of precious metals investments to make
There are certain criteria to look for when investing in mining stocks, regardless of whether you invest directly in a precious metals mining company or if you prefer a precious metals mutual fund or ETF. Either way, you should target investments that feature mining companies that have already experienced profits. These companies should have experienced management, low amounts of debt, mines in production, and high-quality reserves. Characteristics like these are the defining elements of a successful mining company, and that success can be funneled down to those who own investments into the company.
What kind of precious metals do you find to be the most enticing these days?
Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors navigate the minefields of the financial industry. Nancy's book, Make Money Buying & Selling Stocks is an introduction for new investors and a reminder for experienced investors on how to profit in the stock market.Learn More