ETF Securities Plans Physically-Backed Metal ETFs

by on February 25, 2011 | ETFs Mentioned:

ETF Securities, the Europe-based ETF issuer responsible for a series of ultra-popular physically-backed precious metal ETFs, recently made an SEC filing detailing plans for a series of physically-backed exchange-traded products targeting the industrial metal space. In total, the filing calls for seven funds with one targeting each of aluminum, copper, lead, nickel, tin, and zinc, as well as a basket fund which will invest in all of the six aforementioned commodities. No expense ratios or ticker symbols were included, but the filing did include a significant amount of information on how the proposed funds would work.

The proposed funds would offer exposure to these industrial metals through the use of warrants evidencing ownership of physical aluminum, copper, lead, nickel, tin, and zinc. That would be different from the strategies used by existing physically-backed precious metals ETFs, which store the underlying assets in secure vaults. Such a strategy works for funds offering exposure to metals with high value-to-weight ratios such as gold, but the lower relative value of industrial metals necessitates an alternative approach to offering physical exposure [see What Every Investor Should Know About Commodity ETF Investing].

Contango vs. Storage Fees

Currently, there are already ETPs offering exposure to many of the metals covered by the new filing, including aluminum (JJU), copper (JJC), lead (LD), and nickel (JJN), as well as a handful of broad-based ETFs and ETNs that offer exposure to a basket of precious metals. All of the existing funds in the Metals ETFdb Category, however, offer exposure through a futures-based strategy. Because the underlying assets are futures contracts that must be rolled in order to avoid taking physical delivery, the returns delivered by these funds depend not only on the change in the spot price, but on the slope of the futures curve. The adverse impacts of contango have frustrated some investors in commodity ETPs recently, with return erosion creating significant gaps between the returns to a futures-based fund and a hypothetical investment in spot prices.

Physically-backed industrial metals ETF would eliminate the impact of contango (and backwardation) on returns, but would also require the products to incur the storage costs associated with housing the metals in warehouses. As mentioned previously, the high value-to-weight ratio of gold—which is worth about $1,400 per ounce—makes the storage costs relatively minor. Even for silver—worth about $30 per ounce—the storage costs are minor for physically-backed ETFs. But industrial metals are much cheaper than precious metals, meaning that storage fees can be a material portion of the assets’ value.

Although expense ratios were not available at this time, investors may be able to glean some information from a chart in the filing that detailed current storage fees for the industrial metals (all info is in U.S. cents per metric ton per day)

  • Aluminum: 40 cents
  • Copper: 36 cents
  • Lead: 35 cents
  • Nickel: 45 cents
  • Tin: 42 cents
  • Zinc: 36 cents

ETF Securities noted that these fees have risen steadily over the past decade–at roughly a 5% growth rate–and that fees have shown significant volatility. “Storage Fees for the same period have varied considerably, ranging from 1% per annum (for Nickel and Tin in 2009) to 22% per annum (for Lead in 2002),”said the filing.

So the effective expenses for accessing these metals could me higher than many ETFs on the market. It should be noted, however, that storage fees are effectively baked into the slope of the futures curve—meaning that contangoed futures markets reflect, among other factors, the costs of storage. So while the expenses for these physically-backed funds will likely appear to be considerably higher than their futures-based counterparts, they may be comparable or even preferable in terms of the “all-in” cost to investors [are Physically-backed Industrial Metal ETFs On The Horizon?].

ETF Securities Expansion

If approved and launched, the new funds would double the current lineup of ETFS products from seven to fourteen and expand the company’s U.S. product suite beyond its traditional focus in the precious metal space. Currently, the company’s most popular fund is SGOL, a physically-backed gold fund that has managed to accumulate over $1.2 billion in assets, while similar levels of success have also been seen in the company’s palladium and platinum funds, PALL and PPLT. The company’s foray into an industrial metal basket also has precedent in the precious metals space as well; currently the company has two products offering exposure to a variety of precious metals. GLTR tracks all four of the elements in the precious metal group, while WITE leaves out gold but invests in the three white metals of silver, platinum and palladium [see Commodity ETFs Get No Love From Investors].

ETF Securities recently debuted physically-backed ETFs offering exposure to copper, nickel, and tin. In the U.S., both iShares and JPMorgan have taken the preliminary steps to launch physically-backed copper ETFs.

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Disclosure: No positions at time of writing.