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Both bulls and bears have been flocking to precious metals ETFs such as the iShares Silver Trust and Market Vectors Gold Miners 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.

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As the U.S. 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.

Here are two gold ETFs: SPDR Gold Shares and iShares COMEX Gold .

There is no difference between the funds except that GLD has 30 times the assets and volume of IAU. While GLD is larger, both funds have high liquidity. Investors can buy and sell shares of both GLD and IAU near their underlying values.


Here are two silver ETFs: Silver Trust and iShares Silver Trust ETF .

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SLV is a well-established physical silver ETF, with more than 8.5 million shares changing hands on an average trading day. SIVR was just launched this summer and will take time to garner investor interest that is comparable to SLV. While SIVR is gaining speed quickly, investors should stick to SLV until the new fund is more established.

Futures ETFs

These funds, which hold gold futures contracts and are organized as partnerships, belong to a group of exchange-traded products that have come under intense scrutiny in recent weeks. The CFTC is currently considering limitations on the number of futures contracts that certain funds can own, limiting the size of some exchange-traded products.

None of the three products listed below is conspicuously large. The two ProShares gold funds, however, could face double regulations in the future. Since they are futures-based, they could suffer from a CFTC crackdown, while their leverage could draw the ire of FINRA.

The gold products include PowerShares DB Gold , ProShares Ultra Gold and ProShares UltraShort Gold .

The silver products include PowerShares DB Silver Fund, ProShares Ultra Silver ETF and ProShares UltraShort Silver ETF . PowerShares DB Gold and Silver use Deutsche Bank's Optimum Yield Index, which aims to maximize gains from backwardation (futures prices lower than spot prices) and minimize losses from contango (futures prices higher than spot prices). ProShares funds are leveraged and deliver double the daily change in prices.

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Exchange-traded notes are debt instruments that track an index. They expose the investor to the credit risk of the issuer. Investors should be mindful of this special type of risk before they purchase these funds.

The gold ETNs include PowerShares DB Gold Double Short ETN , PowerShares DB Gold Double Long ETN , PowerShares DB Gold Short ETN and E-TRACS CMCI Gold Total Return .

The silver ETN is E-TRACS CMCI Silver ETN .

As with the PowerShares DB ETFs, Gold and Silver ETNs use the Optimum Yield Index. The leveraged ETNs deliver twice the monthly change in gold or silver. E-TRACS CMCI, issued by UBS, tracks a basket of futures spread across five maturity dates and "is designed to be representative of the entire liquid forward curve of the gold (or silver) contracts."

Stock ETFs

The gold ETF is Market Vectors Gold Miners. This fund tracks the NYSE Arca Gold Miners Index, which tracks companies primarily engaged in gold mining. GDX currently holds 32 stocks and top holdings include Barrick Gold, Goldcorp, Newmont Mining, and AngloGold Ashanti Limited ADR.

Assessing Risk Tolerance

Changes to leveraged and/or futures-based commodity funds could be damaging to the structure of corresponding gold and silver ETFs. As regulation is hashed out, the average investor is better off gaining exposure to these metals through physical or equity based instruments. Only sophisticated investors should consider leveraged products. The physical ETFs offer lower fees than the futures ETFs and, therefore, offer more value.

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