NEW YORK (
) -- The successful
ETFS Physical Platinum Shares
ETFS Physical Palladium Shares
ETFs on Jan. 8 once again proved the efficiency of ETFs in opening up segments of the market to everyday investors.
Now, the price of platinum in the U.S. -- once influenced by a small group of manufacturers, futures traders and miners -- will reflect the demand of American investors, who have flocked to ETFs for inexpensive, transparent exposure.
Criticism of PPLT and PALL, the first U.S. ETFs to offer physically backed exposure to platinum and palladium, is both misguided as well as misdirected.
According to a
Jan. 19 Wall Street Journal article
, "Platinum and palladium futures rose sharply Tuesday, settling at their highest levels since July, boosted by demand from newly launched exchange-traded funds that are luring investors, but could be a headache for consumers of the physical metals."
While platinum and palladium futures markets will undoubtedly reflect the increased demand for the physical metal, PALL and PPLT can hardly be held responsible for manipulating the futures market and "luring" investors.
Like the massive
SPDR Gold Shares
ETFs, PALL and PPLT are backed by physical assets, meaning that the funds have to buy and store the metals to meet investor demand for shares.
Physically backed ETFs like PALL and PPLT are a world apart from the futures-backed funds that have recently drawn the ire of the Commodities Futures Trading Commission (CFTC). It is futures-backed funds, such as the
United States Natural Gas
, that truly have the potential to manipulate markets and lure investors into vehicles inappropriate for their strategies.
Prior to physically backed PALL and PPLT, investors looking to access platinum through an exchange-traded strategy had to settle for the futures-backed
iPath Dow Jones Platinum ETN
. This exchange traded note's
with futures regulation is a good illustration of how investors can be misled by some commodity funds.
On Oct. 15, 2009,
announced that it was suspending further sales and issuance of PGM. New limitations on futures positions capped the size of PGM, halted new share creation, and effectively turned PGM into a closed-end fund.
This kind of disruption in trading taxes investors, causing dislocation between a fund's underlying value and market value. Ideally, an ETF's or ETN's trading value should be as close as possible. The proximity of these values is useful in judging a fund's liquidity, as well as the general effectiveness of its strategy.
The capping of PGM's share creation is currently taxing investors with a premium. As trading commenced today, investors wanting to buy PGM had to pay $39.50 for a share worth $38.68.
PALL and PPLT offer straight-forward, transparent access to physical platinum and palladium. Rather than having to buy and safeguard the physical metal, investors can instead scoop up shares of PALL and PPLT.
ETFs have once again made part of the market more accessible to U.S. investors. It is up to them to safeguard this privilege.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion did not have positions in any of the funds mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.