It once was all about the Benjamins, but now it seems to be all about the metals. Access to the metals market is expanding at a phenomenal rate with the aid of exchange traded funds (ETFs). The popularity of the ETFs reveals the growing acceptance of commodities as a useful portfolio tool.
Since metals ETFs appeared on the scene, they’ve opened doors to new investors and shifted the supply and demand fundamentals a bit:
- ETFs have provided the average investor with a low-cost way to trade asset classes like commodities and currencies that were previously only available to institutional investors and sophisticated traders.
- Some metals ETFs, particularly those that are backed by physical bullion, have altered the supply and demand picture some by creating a new market for such metals. For example, platinum investing demand was negligible before platinum group metal funds launched; now it accounts for 11% of total demand.
- Metals ETFs have given investors new ways to hedge inflation, protect their portfolios and diversify across asset classes in a convenient and easy-to-use format.
- Metals ETFs now come in all shapes and sizes. Physically-backed, futures contracts, stocks, swaps. You can not only get the exposure, but you can choose just what type of exposure you want. [The 4 Types of Commodity ETFs.]
If you’re going to take the metals plunge, be aware of the higher tax treatment of capital gains and the fact that some funds use derivatives. [ETFs and Taxes: What You Should Know.]
Additionally, the multi-year rally in precious metals may be luring investors into a possible market correction. You can cope with that by having a sound strategy that incorporates a stop loss if and when the correction appears. [How to Follow Trends.]
Investment manager ETF Securities has benefited from the growing investor interest in the commodities market, comments John Spence for MarketWatch. The two ETFs the company offers, the ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL), have already raked in more than $700 million combined, with PPLT taking in $470 million of the total. [Fundamentals Favoring Platinum and Palladium ETFs.]
The two new offerings are physically backed by the precious metals platinum and palladium, which are also used in industrial applications. There are also three platinum exchange traded notes (ETNs): E-TRACS UBS Platinum (NYSEArca: PTM), iPath DJ AIG Platinum (NYSEArca: PGM) and E-TRACS UBS Short Platinum ETN (NYSEArca: PTD). ETNs are debt backed by the full faith and credit of the issuer, so understand this risk. [The Difference Between ETFs and ETNs.]