4 ETFs That Could Glitter in 2012

by Susan J. Aluise | December 23, 2011 1:44 pm

Investors looking to cash in on precious metals can look beyond the lure of gold and silver — platinum and palladium have become new objects of their affection. Investing in “P&P” used to be as difficult as investing in any other physical asset, such as gold or silver. But exchange-traded funds (ETFs) have emerged as a more convenient way to gain exposure to these commodities.

Platinum and palladium ETFs have traded on European exchanges for years but are relative newcomers to U.S. markets. Several funds were launched within the past couple of years, so they don’t bring the extra assurance of a long track record.

But to all precious metals, there is a time and a season. These twin white metals (they’re actually “sister” elements in the platinum family) soared last year as nightmares of the 2009 supply glut gave way to a resurgence of demand for both commodities. But the March earthquake, tsunami and nuclear disaster in Japan interrupted their comeback season.

A little background: Platinum is the upgrade to gold in jewelry, but palladium is important to jewelry, too.  It’s used as an alloy to make white gold. (The palladium market in China is particularly robust.) Besides the jewelry-manufacturing niche, there are many other industrial applications for platinum and palladium — most notably, in auto manufacturing.

After auto production fell off a cliff earlier this year due to parts shortages, prices for the two metals fell. As automakers boost production volume in a recovering economy, demand is once again likely to outpace supply — and ETFs are a convenient way for investors to take advantage of that trend.

ETFs backed by physical platinum or palladium have many advantages over buying bullion or coins.  Investors avoid the high initial investment and the cost of storing, securing and insuring bullion or coins.  ETFs also trade via a major exchange and boast greater liquidity and transparency.

Price volatility is a given with precious metals — platinum and palladium have sent investors on a particularly wild ride over the past couple of years. Still, diversification is never a bad idea, and precious metals can be a good hedge against governments’ bad spending choices.  With those caveats, here are four ETFs to consider if you’re in the market for the other white metals:

Palladium

Performance-wise, palladium has been the better bet so far this year — but wild pendulum swings have made for white-knuckle moments during the past couple of months. Because of palladium’s manufacturing uses, hopes for a rebounding economy have given these ETFs a year-end bounce.

VelocityShares 2x Palladium ETN (NYSE:LPAL[1]).  LPAL is the baby of the bunch, having just launched in October.  It’s a leveraged fund that doesn’t hold physical palladium and offers exposure to palladium futures contracts by tracking the S&P GSCI Palladium Index ER. With a market cap of $3.2 million, LPAL gained nearly 10% on Thursday to close at about $53. That’s a 22% increase since this time last month. Its one-month return is 4.2%, but the expense ratio is pretty high at 1.35.

ETFS Physical Palladium Shares (NYSE:PALL[2]).  PALL does invest in physical palladium bullion and tracks the metal’s price on the spot market; it was launched in January 2010. With a market cap of $383 million, PALL is trading at $64.50 — 22% above its 52-week low in October. Its one-month return is 7.9%; its one-year return is –16.5%. The expense ratio is a tamer 0.6.

Platinum

Spooked by Europe, platinum prices have careened off a cliff in recent months, making it a bargain now. Consider that an ounce of traditionally more expensive platinum was trading at the bargain price of $1,420 an ounce on Thursday — $175 below the price of gold.

ETFS Physical Platinum Shares (NYSE:PPLT[3]). This fund’s holdings are in physical platinum bullion and PPLT tracks prices on the spot market; it was launched in January 2010. With a market cap of $626 million, PPLT is trading at around $140, nearly 26% below its 52-week high in August.  Its one-month return is –7.6%; its one-year return is –17.5%. Its expense ratio is 0.6.

UBS AG E-TRACS UBS Short Platinum (NYSE:PTD[4]).  PTD is a short fund, the performance of which is inversely tied to platinum futures contracts. It’s old enough to have been through some of the white metal’s waxing and waning fortunes — it has been around since May 2008. Betting against platinum has worked well for the fund’s investors this year. With a market cap of $3.8 million, PTD is trading at $34.74 — more than 38% above its 52-week low in September.  Its one-month return is 14%, and its one-year return is nearly 17%.  Its expense ratio is 0.65.

As of this writing, Susan J. Aluise did not hold a position in any of the funds named here.

Endnotes:
  1. LPAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=LPAL
  2. PALL: http://studio-5.financialcontent.com/investplace/quote?Symbol=PALL
  3. PPLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=PPLT
  4. PTD: http://studio-5.financialcontent.com/investplace/quote?Symbol=PTD

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