PPLT, PALL Come Flying Out Of The Gate

by on January 18, 2010 | ETFs Mentioned:

Given the tremendous amount of buzz surrounding the launch of the first U.S.-listed platinum and palladium ETFs earlier this month, perhaps the initial results for the ETFS Physical Platinum Shares (PPLT) and Physical Palladium Shares (PALL) shouldn’t be that surprising. Through their first six days of trading, average volumes for PPLT and PALL were about 310,000 and 465,000 shares, respectively. PALL traded more than a million shares on its fourth day of trading. The two funds took in $83 million in assets on the first day of trading and topped the $100 million mark shortly thereafter.

Fast starts are becoming routine for ETF Securities: last year, the ETFS Silver Trust (SIVR) and Physical Swiss Gold Shares (SGOL) came flying out of the gate, breaking through the $100 million mark in record time and finishing 2009 with aggregate assets of nearly $500 million. Despite the tremendous demand for the new platinum and palladium products, the creation process appeared to be working efficiently, as neither fund was trading at a severe premium or discount. PPLT was recently trading at less than ten basis points above its NAV, while PALL was showing a premium of about 0.5%. For a closer look at the new funds see these complete guides to platinum and palladium investing.

According to the fund prospectuses, PPLT’s holdings are limited to 478,000 ounces of platinum, while PALL can hold up to 1.29 million ounces of palladium. If these ETFs were to hit their maximums, the value of underlying assets would be about $750 million and $550 million, respectively. As of January 14, PPLT had amassed just under 90,000 ounces of platinum. PALL had almost 100,000 ounces of palladium after its first week of trading, meaning that both funds still have significant room for growth before running up against share restrictions.

In an interview with Hard Assets Investor, ETF Securities Chairman Graham Tuckwell attributed the early success of these funds to “pent-up demand,” noting that the company selected the initial caps on the funds with an eye on the registration fees that had to be paid regardless of whether the products were ultimately approved.

Room To Expand?

Further expansion of the funds may not be a slam dunk. The global platinum market is significantly smaller than the market for gold, with annual production levels approximating only 5% of the yellow metal. All the platinum ever mined would fit in a room measuring less than 25 feet cubic feet.

If PALL were to reach its limit, fund holdings would represent about 16% of the ten year average global supply. If PPLT were to max out, holdings would represent about 7% of the annual supplies. The initial approval process for PALL and PPLT was painfully long in large part because of concerns over the impact the funds would have on market prices for the precious metals. The issue is a delicate one because of the political complexities: about half of the demand for platinum and palladium comes from the automotive industry for use in catalytic converters. Given the well documented struggles of car companies around the globe, regulators may be hesitant to endorse any move that could be perceived as kicking the industry while it’s down.

On the other hand, many believe that PALL and PPLT are not nearly large enough to begin moving markets. Tuckwell noted that demand for shares would have to far exceed current levels before moving the market became a concern, and indicated that ETFS has been in dialogue with the SEC on the  issue. And even if PPLT and PALL were to hit their caps, the funds would still be smaller than other precious metals ETFs relative to the size of the market for the underlying commodity. The SPDR Gold Trust (GLD) currently holds about 1,100 tonnes of gold, or nearly 30% of annual global production.

Regardless of what happens next, ETF Securities has established itself as a major player in the U.S. ETF space. Firm assets should exceed $1 billion sometime in the first quarter, and we could see the first diversified precious metals ETF sometime this year. For updates on new products from ETFS and other issuers, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.