Physical metals have historically been viewed as a portfolio hedge that would cushion your downside in times of market malaise. But there are challenges to holding bullion, not the least of which is securely storing and trading it. Exchange-traded funds (ETF) have mitigated those challenges, though, by offering investors direct exposure to metals.
Holding actual physical bullion is, in most cases, preferable to derivative exposure, whether through miners or futures. Miners are much more sensitive to macroeconomic conditions and can drop quickly in declining markets; this is a particular concern when credit is tight, as we saw in 2008. Futures-based funds are also prone to creating tax complications and are subject to market forces such as contango. But the value of bullion can rise even when everything else is declining, providing a hedge precisely when you need it.
Physical bullion funds are hardly new; SPDR Gold Trust (NYSE: GLD) is probably the best-known ETF after the broad-based SPDR S&P 500 (NYSE: SPY). Each share of the gold ETF is backed by about a tenth of an ounce of gold; the fund has more than 30 million ounces of gold stored in vaults under the streets of
The fund’s share-creation process permits no “phantom metal”–authorized participants must present bullion when they want to create new blocks of creation shares. Because of these requirements SPDR Gold Trust almost precisely tracks movements in the spot price of physical gold.
Bullion funds have been slow to catch on in the ETF universe, primarily because they face the same storage challenges any other investor would encounter. The costs of securely storing and transporting bullion can quickly reach astronomical levels as the asset base of the fund grows. In the case of
To address these hurdles ETFS Securities has launched a line of four physical commodity ETFs encompassing gold, silver, palladium and platinum. The latter two are of the most interest.
Palladium and Platinum: Buy the White Metals
Palladium is an industrial metal with a variety of uses, ranging from water treatment and oil refining to cancer treatment and dental work. It’s probably best known for its use as a catalyst in catalytic converters to reduce automotive emissions.
Over the past year the price of the metal has risen from a low of $214 to its current price of about $477. It’s currently more than $100 off a five-year high established in early 2008, and there’s every reason to expect the price to move higher as the global economic recovery gains steam. Palladium also reflects the health of automobile manufacturers because more than half of the annual production is used in the production of catalytic converters.
Platinum is even rarer than gold–last year only about 6 million ounces of platinum were mined versus almost 65 million ounces of the yellow metal–and has the additional benefit of being used in a variety of industrial applications. Like palladium, platinum is a key component in catalytic converters as well as electronics such as LCD televisions and computers. Given its industrial uses the metal tends to lag gold when fear is running high, but prices tend to recover much more quickly when the economy is on the mend.
Platinum isn’t as effective a hedge against tough economic times, but it is an excellent play on a continued recovery.
ETFS Physical Palladium Shares (NYSE: PALL) and ETFS Physical Platinum Shares (NYSE: PPLT) are the only physical bullion funds dedicated to the two metals, both of which are excellent ways to bet on improving global economic health. Both funds are also quite liquid with tight spreads despite being recent market entrants, a clear demonstration of investor demand.
What we’d really love to see–given the economic sensitivity of the metal–is a physical copper fund. Unfortunately storing enough of it to back a fund of any size is likely too impractical. But don’t be surprised if we see more of these types of funds come to market.
New ETFs: Buy
Quant shop IndexIQ Advisors is best known in the ETF universe for bringing hedge funds to the masses via IQ Hedge Multi-Strategy Tracker (NYSE: QAI) and IQ Hedge Macro Tracker (NYSE: MCRO).
These funds seemed to be geared toward institutional investors and financial advisors; although most of their offerings are a bit too esoteric for the average retail investor though, if you have a way to work them into your portfolio you could see some interesting results.
However, IndexIQ last week brought two new offerings to market last, both of which are much more accessible than its previous vehicles.
On March 23 IQ Canada Small Cap (CNDA) and IQ Australia Small Cap (KROO) began trading. These single-country small-cap funds are interesting for a few reasons.
First, they’re both much more focused on Canadian and Australian consumers than their country-specific peers, albeit through a small-cap lens. Consumer spending drives about a quarter of IQ Australia’s holdings and about 12 percent of IQ Canada’s. And, reflecting the fact that both
Second, financials make up a huge chunk of small-cap stocks in almost every developed nation. But for these two funds the sector accounts for just 1.5 percent (IQ Canada) and 10.1 percent (IQ Australia). This is largely a function of the fact that the funds try to mirror their respective broad economies rather than simply the small-cap universe.
Finally, both funds are well diversified with 100 holdings each, none of which make up more than 2.5 percent of assets. At the same time, the funds are relatively inexpensive with expense ratios of 0.69 percent.
IndexIQ has said that the launch of these two funds is the opening salvo in a planned launch of an entire line of similar offerings. The new funds should be a boon for the asset manager, which has struggled to attract assets to its more esoteric offerings. From our perspective, these are just a couple more useful options for individual investors to tap into attractive markets.
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