As the ETF industry has expanded in recent years, a significant portion of growth has come from the tremendous rise in popularity of exchange-traded commodity products. In addition to broad-based funds such as DBC or DJCI, several commodity-specific products have accumulated billions of dollars in assets, and several were even among the very largest of all ETFs at the end of 2009. In addition to the SPDR Gold Trust (GLD), the second largest ETF with more than $40 billion of assets, silver (SLV, $5.2 billion), natural gas (UNG, $4.6 billion), and crude oil (USO, $2.6 billion) have become extremely popular investments.
But the opportunities for commodity ETF investing go far beyond these “super funds,” with products offering exposure to everything from corn to tin now available. Moreover, the universe continues to expand, as evidenced by the recent launch of the first platinum ETF from London-based ETF Securities, the ETFS Physical Platinum Shares (PPLT). Platinum presents a unique set of risk and return characteristics, and as shown by the intense speculation leading up to the launch, could prove to be very popular among U.S. investors.
Long Road to Market
European investors have had access to a platinum ETF for years, but PPLT’s road to market was a challenging one. Because global supplies of platinum are so small — annual production is about 7 million ounces — many worried that the launch of an ETF could result in “hoarding” by investors and distort prices paid by industrial users of the metal. In December 2009, the SEC ultimately approved a rules change that paved the way for the launch of a platinum ETF. Shortly thereafter, Susquehanna seeded the fund, agreeing to purchase 100,000 shares. PPLT launched in early January 2010.
Platinum is the best known of the six platinum group metals (PGMs), a collection of natural resources used in the production of a wide variety of industrial equipment. About half of the global demand for platinum comes from the autocatalyst sector, as the metal is a critical component of catalytic converters for automobiles. Other industrial demand comes from chemical, electrical, glass, and petroleum applications. Jewelry also accounts for a significant portion of platinum demand.
About 60% of global platinum supplies come from South Africa, with Russia, Canada, and the U.S. among the other major platinum-producing regions. Following a spike in prices earlier this decade, recovery of platinum from scrapped automobiles has become an increasingly popular practice (not to mention a potentially profitable activity). Supplies derived from autocatalyst recycling increased from 420,000 ounces in 1999 to more than 1.1 million ounces in 2008.
In addition to its precious metal qualities, platinum is used extensively by industrial consumers. As such, prices of the metal are impacted by a number of different factors, including:
- Health of global auto industry
- Technological advancements related to auto emissions
- Production levels and exploration activity in platinum-rich regions
- Geopolitical tensions in platinum-producing regions
Prior to the launch of PPLT, two existing exchange-traded products offered long exposure to this metal: the iPath Dow Jones-UBS Platinum Subindex Total Return ETN (PGM) and UBS E-TRACS CMCI Long Platinum Total Return ETN (PTM). Another UBS product, the CMCI Short Platinum (PTD) offers short exposure to platinum.
The platinum fund from ETF Securities is different from these products in a few very important ways. First, PGM and PTM are structured as exchange-traded notes (ETNs), meaning that they expose investors to some degree of credit risk. ETNs are essentially senior, unsubordinated debt instruments backed by the issuing financial institution. While this structure can reduce tracking error, it also creates potential, however unlikely, for losses stemming from a default.
PPLT is a physically-backed ETF, meaning that it buys and stores platinum bullion in secure vaults. PGM and PTM, on the other hand, are linked to indexes that employ futures-based strategies, reflecting the returns that are available through an investment in futures contracts on platinum. While changes in spot prices generally correlate to changes in futures prices, the relationship is far from perfect. There are a number of nuances to futures investing, meaning that increases or decreases in spot prices are only one of several factors that impact the prices of PGM and PTM. Contango in futures markets can eat into returns on commodity products, as investors in UNG and USO learned the hard way in 2009. But the results aren’t always unfavorable – a futures-based strategy to outperform in certain environments.
Because the underlying assets of PPLT consist of platinum bullion, the price of the fund should correspond almost exactly with spot prices on platinum. The metal entitlement of each share of PPLT is 0.1 ounces of platinum, meaning that the net asset value of shares should correspond to roughly one tenth the spot price of the metal.
Variety of Uses
The possible uses for platinum in a portfolio are numerous. As a precious metal, PPLT could potentially provide protection against inflation or act as a safe haven investment in uncertain economic environments. Its prevalence in automobiles also makes this fund a way to bet on a sustained recovery in the global automotive industry.
PPLT has already proven to be a big hit with investors, and the fund will likely gather considerable assets in coming months. For updates on this fund’s performance, sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.