I recently wrote an article in which I argue that shares of Sprott Inc. (OTC:OTCPK:SPOXF) stand to benefit from an increase in revenues realized from the Sprott physical bullion trusts. In my discussion I list specific benefits that the company's gold (NYSEARCA:PHYS) and silver (NYSEARCA:PSLV) trusts have over their more popular counterparts (the SPDR Gold Trust (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA:SLV). However I did not discuss the Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP) as I felt that doing so would add substantially to the amount of information that readers had to digest without really adding to my thesis. SPPP is small, and there are no comparable funds given that it holds both platinum and palladium.
I feel a follow-up is welcomed given my omission from the aforementioned article, although my focus here will be to outline the advantages that the SPPP has over other platinum and palladium funds, particularly those offered by ETF Securities ((NYSEARCA:PPLT) for platinum and (NYSEARCA:PALL) for palladium). This is the case because not only am I bullish on both platinum and palladium (although more so on the latter, as I discuss here), but because there are very few options available to platinum and palladium investors: most of the mines are located in geo-political hot spots, and the few that aren't have failed to impress me as potential investment options.
There are just a handful of ETPs available to platinum and palladium investors, and they are all quite illiquid (a feature that reflects trading activity in the futures markets, especially for palladium). The three that are sizeable enough to consider holding are those already mentioned:
- The ETF Securities Physical Platinum Trust
- The ETF Securities Physical Palladium Trust
- The Sprott Physical Platinum and Palladium Trust
The first two funds are pretty straightforward in their holdings. The Sprott Trust gives investors exposure to both platinum and palladium, although like myself, it favors the latter. As of the end of October the trust contained 82,185 ounces of platinum and 187,714 ounces of palladium. At current spot prices ($1,435 for an ounce of platinum and $750 for an ounce of palladium), the fund holds about 54.4% palladium and 45.6% platinum.
I think that the Sprott fund is superior for the following reasons.
The Sprott Trust has an annual expense ratio of 0.5%, whereas the ETF Securities offerings each have a 0.6% expense ratio, making the Sprott fund 17% cheaper.
The platinum and palladium held by the ETF Securites funds are treated as collectibles, and profits on them will be taxed at 28%. Profits on SPPP holdings will be treated as if it were a stock, meaning that if you hold the fund for longer than a year then it will be taxed at 15% or 20%, depending upon your tax bracket.
The Custodial Situation
Sprott's platinum and palladium are held with a single custodian in Canada. As stated on Sprott's website: "the Trusts hold their bullion assets in custody at a Federal Crown Corporation of the Government of Canada."
The custodial situations for the ETF Security funds are far more complex. The platinum and palladium may be held with subcustodians, which are chosen by the custodian (JP Morgan (NYSE:JPM)). Subcustodians may employ additional subcustodians to hold the funds' platinum or palladium. The trustee (The Bank of New York Mellon (BK)) has no say in this. If platinum or palladium that is held by a subcustodian is lost, then PPLT or PALL shareholders have limited legal recourse (ETF Securities Platinum Trust prospectus, p. 11). Basically, if (1) the custodian gives some of the PPLT's platinum or PALL's palladium to a subcustodian to hold, (2) this subcustodian loses or steals some or all of this platinum or palladium, and (3) the custodian can prove in court that (1) was a reasonable action (i.e., JP Morgan had reason to believe in the competence and integrity of the subcustodian), then the custodian is not responsible for shareholders' losses.
Redemption of Shares For Bullion
Investors in the Sprott Trust can redeem shares for physical platinum and palladium. This is not the case for ETF Securities' platinum and palladium products.
Disadvantages of the Sprott Trust
There are two disadvantages to the Sprott Trust that investors should consider. First, investors are stuck with the allocation to the two metals chosen by Sprott. If an investor wants 70% palladium to 30% platinum, then s/he can easily do this by buying appropriate amounts of the ETF Securities' funds.
Second, the Sprott Trust is a closed-end fund, and it can trade at a premium or a discount to its NAV. In fact given its favorable tax treatment it should trade at a slight premium. However for those investors and traders looking for more precise exposure to platinum and palladium the ETF Securities funds should be a better option. Nevertheless the lack of liquidity in all three funds means that bid/ask spreads will be relatively wide and direct exposure to platinum and palladium prices will be difficult to achieve using any of them.
While all of these funds have their problems, especially for those with a trader's mentality, the Sprott Trust has several advantages that make it especially appealing for longer term investors in platinum and palladium.
Disclosure: I am long PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own physical palladium coins and bars