Is This The Commodity ETF For You?
In 2006, more than 239 tons of platinum were bought and sold. 24 tons were used in the electronics and chemical industries… almost 50 tons were used in jewelry… and the remainder was used for automobile emissions control.
Despite having a reputation as a precious metal, platinum is used in a wide variety of industrial applications.
As the global economy improves, demand for platinum has only one direction to head, and that’s up. Many investors are searching for ways to participate in the movement of this commodity. The easiest way to trade platinum (and most other commodities) is with an ETF. However, anyone looking to make an investment needs to be careful.
As you’ll soon learn, not all Commodity ETFs are created equal.
Let me give you an example.
Recently in my Commodity ETF Alert service, we put on a trade in platinum. It was a great trade. We were watching the markets and noticed inflation was starting to become a serious threat. Knowing hard assets would jump in value, we established a position in the precious metal.
We bought shares of the iPath Dow Jones-UBS Platinum ETN (PGM).
Sure enough, as the end of the year approached, inflation started becoming a concern… and precious metals prices started moving higher. In only seven weeks, we grabbed a quick 39% gain!
Like I said, it was a great trade.
But we assumed some risks. If you take a few minutes to read the prospectus for this security, you’ll find some fascinating things…
One big risk is the value of the security.
The value of PGM might not match the value of the actual commodity. The value of PGM is based on an index… which is linked to the price of the index components… and those index components are tied to futures contracts… which reflect the price of the physical commodity.
Needless to say, it’s a complex set-up and one where the value of an investment might not actually match the value of the commodity on the open market.
But that’s not the biggest concern.
A bigger concern is credit risk.
Remember, these ETNs are issued by Barclays Bank. If Barclays goes under, or even if their credit rating gets downgraded, these ETNs might lose value. In essence, the strength of this ETN rests on the shoulders of Barclays.
Now, I have no reason to question the financial strength of Barclays… but you just never know.
These investments are all at the mercy of the bank. In October of 2009, Barclays decided to stop issuing new shares of PGM. The government put in place new restrictions on the futures contracts being held by certain organizations. It was an effort to control price volatility. As a result, the price of PGM jumped.
Investors now have to pay-up for the privilege of owning the Platinum ETN. Kind of ironic don’t you think?
That’s why I’ve been watching the most recent group of Commodity ETFs launched by ETF Securities.
The new products focus on platinum and palladium commodities.
ETFS Physical Platinum Shares (PPLT) tracks the price of platinum and ETFS Physical Palladium Shares (PALL) tracks the price of… you guessed it… palladium. The prices on these ETFs are easy to figure out… one share of the ETF represents one-tenth of an ounce of the respective precious metal. Both funds charge a very low fee of 0.6%.
The funds buy the physical assets (no futures contracts here) and store them in vaults. The vaults are controlled by JP Morgan and located throughout Europe – primarily in the UK and Switzerland.
It eliminates the risk of futures prices not matching the actual commodity price… and these ETFs eliminate entirely the credit risk from the issuing bank. In my opinion, they are much better products.
Both platinum and palladium are used in a wide variety of products… everything from electrical equipment, to medical devices, to catalytic converters. As the economic recovery takes hold, demand for these precious metals is sure to climb… and now we have a new and improved way to invest!
If you’re thinking of investing in Commodity ETFs, take a look at PPLT and PALL… I’m sure you’ll like what you see.
Category: ETFs
