London-based ETF Securities, one of the largest European ETF issuers, has filed the prospectus for what would be its third U.S.-listed ETF and the first physically-backed platinum ETF on the NYSE Arca Exchange. The ETFS Platinum Trust (PALL) will seek to reflect the performance of the price of physical palladium, offering a cost-effective and convenient way for investors to gain exposure to one of the world’s rarest metals.
Over half the world’s palladium use related to the manufacture of catalytic converters, which convert harmful gases from automobile exhaust into less harmful substances. As consumers and regulators have moved towards increasingly stringent emissions regulations from the U.S. automotive industry, demand for palladium and platinum, another metal found in converters, has soared.
Palladium, platinum, and four other metals make up the platinum group metals (PGMs), which have a variety of industrial uses as well as uses as a store of value to investors. PGMs are found primarily in South Africa and Russia – Russia is the world’s largest palladium producer while South Africa is the leader in platinum production. These two countries accounted for nearly 80% of PGM supply in 2008.
Automotive customers accounted for the largest portion of palladium demand at 55% in 2008, followed by industrial users (chemical, electronics, etc.) at 23% and jewelry demand at 9%. Palladium investors range from sophisticated hedge funds and mutual funds to amateur coin collectors.
In its prospectus, ETF Securities notes that palladium prices may be influenced by a number of factors, including:
- Hedging activity by palladium producers
- Attitudes of speculators towards palladium
- Interest rate differentials between cost of money and cost of palladium
- Demand from the global automotive industry
As uncertainty has mounted and the U.S. dollar has plummeted, many investors have turned to precious metals as a store of value. These holdings are dominated by gold ETFs (led by GLD) and silver funds (such as SLV) that have billions of dollars in AUM. ETF Securities has broken into this field in recent months, attracting huge cash flows to its physically-backed gold (SGOL) and silver (SIVR) ETFs.
There are several ETFs offering exposure to platinum, including the iPath Dow Jones-UBS Platinum Trust ETN (PGM) and the E-TRACS UBS Long Platinum ETN (PTM). But these products both rely on futures contracts to achieve their objectives as opposed to physically-holding platinum.
The prospectus for PALL did not include an expense ratio. ETF Securities has been successful in gaining market share from larger, more established competitors in part because of its lower cost structure. SGOL has an expense ratio of 0.39% (compared to 0.40% for GLD) while SIVR charges 30 basis points (compared to 50 for SLV).
View the prospectus for PALL here.
Disclosure: No positions at time of writing.