Despite the various reasons silver investors should not buy exchange-traded funds and instead opt for physical metals, there are also many reasons why investors should love them.

ETFs Increase Precious Awareness

Before silver and gold were spotlighted for their extreme gains, only a small percentage of investors even had proper allocations of physical metals in their portfolios. In what was a huge oversight for the average investor, silver and gold began their run upwards in price as stocks fell.

Several years after the rise in metals pricing jumpstarted, exchange-traded fund sponsors begin to release slews of funds that were designed to track the changes in the price of precious metals. Today, ordinary investors can't open the Wall Street Journal or turn on the news without hearing about precious metals investing and popular ETF choices. If you're looking into investing in silver today, you most likely first heard about them via the popular derivative products on Wall Street.

ETFs Drive up Prices

Few can deny the impact large exchange-traded funds have on the commodities markets, especially those that claim to be “physically backed” by holdings in bank vaults. These funds have to invest every dime they receive into precious metals holdings and ultimately drive demand, as well as prices. One otherwise unrelated ETF, the United Natural Gas Fund, at one time held as much as 60% of the front-month futures contracts for natural gas. As you can see, these market behemoths have a dramatic impact on prices. However, they aren't driving prices down; they're driving them up!

ETFs Open to a Trillion Dollar Market

Retirement accounts are one place you're unlikely to see a commodity investment category, and you will certainly never see one for precious metals – until now. A variety of exchange-traded fund sponsors are lining up to encourage corporations, as well as investment companies, to list their ETFs among 401k plans and other products. Retirement planning is a trillion dollar business which controls immense amounts of investors’ monies. Should ETFs break into the mainstream 401k account, it’s likely that precious metals will be even more in demand and rise equally in price.

One Reason to Hate ETFs

Of course, exchange-traded funds are not all bright and shiny. One of the many reasons investors should buy physical metals rather than paper metals is due to high annual fees that most exchange-traded funds charge. There is simply no reason to give away some of your well earned returns just for the convenience of getting a paper statement as to how well your holdings are performing.

For example, the iShares Silver Trust ETF (SLV) charges a whopping .5% annual fee, negating the returns you make on your silver. If you invested $10,000 into SLV, a 10% annual return is worth $61,416 in 20 years. On the flipside, investors who buy $10,000 in physical metals will have $67,274 in 20 years, which is a difference of $5,850. Why give away those extra thousands of dollars, not to mention endure the risk of “paper” metals?

While we can love exchange-traded funds for bringing thousands of investors into the world of precious metals ownership, as investors, it makes little sense to own them ourselves, especially at a cost of $5,850 on a relatively small $10,000 investment.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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