What makes precious metals funds so attractive is that they offer investors the ability to gain unleveraged exposure to gold and other precious metals without taking delivery of physical metal or trading futures contracts. Shares in these trusts offer a convenient and economical way to own a fractional interest in gold or silver bars held by a reputable custodian. The trust is passively managed, so expenses are low–usually about 0.4%–and the shares tend to track the underlying asset’s price (minus expenses) very closely. Importantly for some investors, the gold held in these trusts is allocated: a list of gold bars, their serial numbers, and in some cases, even pictures of the bars, are made available to investors.

Assets held by the SPDR Gold Trust soared from $1 billion initially to almost $35 billion at the end of September 2009, making it the third-largest ETF by assets held in the United States. At least two similar funds, the iShares COMEX Gold Trust (IAU) with about $2.4 billion in assets, and the recently listed ETFS Physical Swiss Gold Shares (SGOL) with less than $100 million in assets, were launched to compete.

Along with gold, there are two funds that own silver bullion, the iShares Silver Trust (SLV), with about $4.5 billion in assets, and the ETFS Physical Silver Shares (SIVR), with about $100 million in assets. Both are structured in the same way as the gold trusts, and have similar expense ratios.

Several other precious metals funds either own futures contracts or are structured as exchange-traded notes. PowerShares offers the DB Gold Fund (DGL) with assets of $157 million, the DB Silver Fund (DBS) with about $70 million in assets, and the DB Precious Metals Fund (DBP), which owns 80% gold and 20% silver and has about $180 million in assets. These funds simply own the actively traded futures contracts to buy gold or silver. (Capital not needed as collateral for the futures contracts is invested in three-month Treasury bills.)

To maintain exposure for more than a few months, owners of futures contracts must periodically “roll” their holdings into the next actively traded month. Powershares uses a process called “Optimal Yield” that seeks to maximize the gains or minimize the losses incurred from buying one contract and selling another. The silver and gold funds have a management fee of 0.5% and incur brokerage fees of 0.04%, while the combined gold/silver fund has a management fee of 0.75% as well as 0.04% in brokerage fees.

Barclay’s iPath and UBS’s E-Tracs offer exposure to precious metals futures through exchange-traded notes (ETNs). The E-Tracs ETNs are based on the UBS Bloomberg CMCI Gold and Silver Total Return indices, which comprise a basket of five different futures contracts expiring at intervals between three months and three years into the future, with about two-thirds allocated to the nearby, three-month contract. The gold ETN (UBG) has about $4.5 million in assets and an expense ratio of just 0.3%, while the silver ETN (USV) has $3.7 million and expenses of 0.4%. Also, iPath offers a combination of precious metals through its ETN (JJP) (70% gold and 30% silver). It tracks the Dow Jones-UBS Precious Metals Subindex Total Return and has $8 million in assts and a 0.75% expense ratio.

For investors seeking exposure to platinum–the white metal that is more expensive than gold, is mostly produced in South Africa, and primarily used as an industrial catalyst — ETNs offer the only exchange-traded vehicle aside from futures contracts. Barclay’s iPath offers the Dow Jones-UBS Platinum Subindex Total Return ETN (PGM), which owns a single, nearby futures contract. It has assets of about $82 million and a 0.75% annual fee. E-Tracs has long (PTM) and short (PTD) platinum ETNs, with assets of $27 million and $5.6 million respectively. Unlike E-Tracs’ gold and silver ETNs, the index the platinum funds track–the UBS Bloomberg CMCI Platinum Total Return–is based on only one nearby futures contract. Both long and short funds have expenses of 0.65%.

For some investors, commodities are synonymous with leverage. ProShares offers funds that give double the return of spot prices for gold (UGL) and silver (AGQ), using a combination of forward and futures contracts. Despite their higher expense ratios–0.95% for each–these funds have proved fairly popular, with the UGL fund attracting $136 million in assets, and the AGQ fund attracting $98 million. Those anticipating a drop in precious metals prices have the UltraShort gold (GLL) and silver funds (ZSL) with $39 million and $78 million in assets, respectively, and similar expenses. Like most other leveraged funds, they replicate the daily performance of gold or silver, and therefore do not always reflect performance over longer periods of time.