ETF Securities Planning Precious Metal Basket ETF

by on October 21, 2010 | ETFs Mentioned:

As the U.S. economy continues to struggle and more intervention from the Fed seems inevitable, the dollar has been battered in currency markets. The greenback has already lost close to 8% over the past few months against the world’s other major currencies, and while a Chinese rate hike earlier this week helped to temporarily stem the losses, the downward has now resumed. As confidence in paper currency wanes, many investors have been buying up precious metals ETFs, especially those that physically hold gold. In fact, all three of the gold-backed ETFs have more than $1 billion under management and are led by the $56 billion Gold SPDR (GLD). Investors are also looking beyond gold to the rest of the precious metals asset class as options in this increasingly tricky economic situation. Over $1 billion is now invested in physically-backed platinum (PPLT) and palladium (PALL) ETFs, while physically-backed silver funds currently hold more than $8 billion [see Next Up: Gold ETF With Vaults In Asia].

With demand for precious metals surging, ETF Securities has plans to offer investors a way to play all of the metals at once with its through a proposed Precious Metal Basket Trust (GLTR). In a recent filing with the SEC, the company detailed plans to launch this new fund, which if approved, would be the first product available to U.S. investors offering physically-backed exposure to four precious metals through a single ticker.

Fund Breakdown

According to the filing, each share in the proposed fund would correspond to approximately 0.03 ounces of gold, 1.1 ounces of silver, 0.004 ounces of platinum, and 0.006 ounces of palladium. At current spot prices, this translates into a breakdown that is heavily weighted in gold and silver. It appears as if GLTR will have an initial weighting that is roughly 52% in gold, 34% in silver, 9% in platinum, and 5% in palladium. While this might seem a little extreme, it is important to remember that palladium and platinum are much more scarce than silver and both have much more industrial applications than gold. For these reasons, it would be prohibitively difficult to acquire the necessary stocks of platinum and palladium.

For example, total gold production just from mines (not including recycled materials) reached 90 million ounces last year. Silver production was even higher at 709 million ounces, while palladium and platinum production came in at roughly 8.4 million ounces and 6 million ounces, respectively [also read Playing Precious Metals Through Equity ETFs].

PPLT and PALL have experienced remarkable success since launching in early 2010. According to the company’s own statistics in the filing, as of October 13, 2010, the ETFS Platinum Trust held approximately 333,533 ounces of platinum, representing approximately 4.8% of the 1999-2009 average annual world platinum supply or approximately 4.9% of 2009 world platinum supply. PALL accounts for an even more significant portion of global supply; as of October 13, 2010, the ETFS Palladium Trust held approximately 841,293 ounces of palladium, representing more than 10.4% of the 1999-2009 average annual world palladium supply [also read Beyond GLD: Three Alternative Precious Metal ETFs].

Despite the heavy weighting in gold and silver, the fund could attract significant interest from a variety of investors, even though its carries a relatively high expense ratio of 60 basis points. If the success of ETF Securities previous four funds is any guide–the four have aggregate assets north of $2 billion–GLTR could be another huge money maker for the European-based ETF provider [also see Are Physically-Backed Industrial Metal ETFs A Good Idea?].

There are currently two precious metals ETPs available to U.S. investors, including the PowerShares DB Precious Metals Fund (DBP) and iPath Precious Metals ETN (JJP). Both of those products split exposure between only two commodities: gold accounts for the majority with a smaller allocation to silver [see all ETFs in the Precious Metals ETFdb Category]

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Disclosure: Eric is long gold and silver bullion as well as IAU.