Commodity Investors: Platinum ETF Investing 101 (PLTM, PPLT, PTM)
Eric Dutram: Platinum is one of the most popular niche commodities and can be considered an extremely lucrative investment avenue. This metal is also seeing more interest thanks to its role as a diversification agent for investors who are heavy in gold and silver, but still want to remain exposed to the precious metal group.
At present, however, the price of the metal has plunged immensely and appears to be undervalued at current levels. This is largely due to platinum’s high beta standing and dependence on more cyclical corners of the market (Top Three Precious Metal Mining ETFs).
Platinum Price Drivers
There are various factors which act as a catalyst for the increase in prices of platinum. Firstly, the automotive industry is a big driver of demand in the platinum market, specifically in catalytic converters to manage vehicle emissions.
However, a slowdown in many key markets and relatively high oil prices have pushed demand for autos lower, driving the price of platinum lower. Although, there is some hope for this slice of the market, as rising consumer confidence and a slowly improving outlook in some regional economies could boost automotive, and thereby platinum, demand in the near future.
Another area which can boost the demand for the metal is the gradual increase in demand for platinum jewelry. With a possible reversal in economic trends and a rise in disposable income of the consumers, demand for jewelry will rise. This could result in higher demand for the metal and possibly a price increase as well (Time to Invest in Platinum ETFs?).
If these forces work together, this will eventually result in demand supply imbalance resulting in ramp up in prices of the metal.
Unfortunately, today’s economic outlook is by no means certain, and another recession could be around the corner. If that happens, platinum could be a compelling short sale candidate and especially so as a pairs trade with a metal like gold which is often seen as a safe haven.
Either way, an investment in a platinum ETF could be an interesting, but potentially high risk, choice in the market. For investors seeking to make a play on the metal, we have highlighted three quality options that could help to accomplish goals in this corner of the space:
ETRACS CMCI Long Platinum Total Return (NYSEARCA:PTM)
ETRACS CMCI Long Platinum Total Return is an ETN designed to track the performance of the UBS Bloomberg CMCI Platinum Total Return Index. The Index measures the collateralized returns from a basket of unleveraged investment in platinum futures contracts. The commodity futures contracts are targeted for a constant maturity of three months.
This ETN neither holds the platinum in physical form nor does it invest in the form of bullion or ingots. It reflects the platinum price by offering a notional investment in platinum future contracts and has assets under management of $32.2 million (see more in the Zacks ETF Center).
Thanks to this approach, there is no tracking error involved; however, credit risk is present since it is a debt security. Also, the fund appears to be less liquid than its counterpart PPLT as it trades volumes of 11,900 shares per day.
In terms of year to date performance, PTM is more or less flat since the start of January. However, the product has lost about 14% in the past three month period suggesting extreme volatility is possible in this product.
Currently, PTM has a Zacks ETF Rank of 5 or “Strong Sell”
ETFS Physical Platinum Shares (NYSEARCA:PPLT)
For a bullion-backed approach to platinum ETF investing, investors can look to ETFS Physical Platinum Shares. PPLT is the only ETF which is backed by physical metal and holds the metal in the form of bullion or ingots. The metal is securely stored in London and Zürich on behalf of the custodian, JP Morgan Chase Bank.
Investing through PPLT in platinum represents a cost-effective and suitable mode for investors. It is expected that the transaction costs for buying and selling the shares will be lower than purchasing, storing and insuring physical platinum for most investors (also seeHas The Junior Gold Mining ETF Lost Its Luster?).
This ETF is designed to track the spot price of Platinum bullion. PPLT is by far the most liquid option available in platinum ETF investing trading with volumes of 23,300 a day. The fund trades with assets under management of $680.4 million.
The expense ratio of 0.60 basis points also appears to be much lower than other ETFs in the space despite the relatively greater costs associated with physically storing the metal (Create a Diversified Portfolio Using ETFs).
The fund had delivered a positive return of 0.1% since the start of the year. However, PPLT has solidly outperformed PTM in the past three month period, losing about 8.4% in the time period.
Currently, PPLT has a Zacks ETF Rank of 5 or “Strong Sell”
First Trust ISE Global Platinum Index (NYSEARCA:PLTM)
Investors should note that this ETF differs from its counterparts in a way that instead of providing direct exposure to platinum price, it seeks to invest in public companies which deal in mining or refining metals of the platinum group.
This means that there is some equity risk in this fund, however you do get a basket of companies in the product. Prices of these securities will still play off of platinum but there will not be a 100% correlation either.
PLTM tracks the ISE Global Platinum Index which is designed to provide a benchmark for investors interested in tracking public companies that are active in platinum group metals (PGMs) mining based on revenue analysis of those companies. PGMs include platinum, palladium, osmium, iridium, ruthenium and rhodium.
In other words, companies included in the index must be actively engaged in some aspect of platinum group metal mining such as pulling the metals out of the ground, refining, or exploration.
Interestingly, the fund also uses a unique methodology to develop weightings based on revenue exposure to PGM production. The component securities are grouped into linearly weighted quartiles and then equally weighted within each quartile (also see Copper Mining ETFs Head-to-Head).
The fund trades with an asset base of $7.75 million. Liquidity profile of the ETF is very low compared with the above two as its volume base stands at 6,300 shares per day. The expense charged is also high compared to its counterparts, at 70 basis points annually.
The fund holds a total of 23 stocks and does not appear to be diversified as concentration risk is very high at 66.2%. Among the sectors holdings, MMC Norilsk Nickel JSC (ADR), Impala Platinum Holdings Limited and Johnson Matthey Plc take the top three positions with 7.69%, 7.43% and 7.26% of assets invested.
In terms of performance, PLTM has been even more volatile than its metal-based counterparts. The product has lost about 23.8% in the past three months and a similar figure from a year-to-date look, suggesting that it could be time to take a closer look at this beaten down market segment.
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