ETF Securities might be a newer name in the United States, but they’re hardly new to exchange traded funds. The provider of a line of popular gold, platinum and palladium ETFs is both a veteran and a pioneer in the European ETF industry.
The provider first appeared on the scene in 2003 thanks to the efforts of Founder and Chairman Graham Tuckwell. Will Rhind, head of sales and marketing at ETF Securities, says Tuckwell was on the investment committee of the Australian Gold Council when some members of the Australian Stock Exchange noticed increasing interest on the part of banks to do derivatives on gold.
“Graham used that opportunity to create the first liquid gold investment and it was the first time anyone had listed a physical commodity on a stock exchange,” Rhind says.
From that beginning grew a thriving business of 180 exchange traded products trading in the United States, Asia and Europe. The provider doesn’t intend to stop there, either. ETF Securities has a satellite presence in Australia with precious metals ETFs, and they’re trying to make some headway into Japan.
Assets today stand at $18.4 billion; $1.5 billion of that is in the United States. Tuckwell still has a majority holding in ETF Securities.
ETF Securities is in a unique position: they’re the only European ETF provider to make the leap into the U.S. market. As a result, the suite of physically-backed metals ETFs were heavily vetted by regulators here before coming onto the scene.
The Gold Issue
Recently, the provider has become acquainted with various questions that seem to continually surround physically-backed metals ETFs. One area of concern to those doubtful as to whether these funds are actually backed by the metal is the language in the prospectus, particularly the disclaimers. But that’s something you just can’t get around these days.
As Rhind says, “It’s just a fact of modern life and law that you cannot have a prospectus that summarizes the agreement between three parties without some formal language to identify each of the parties against each other.
“There’s nothing untoward about a disclaimer – it’s a part of contract law and often in there to protect investors.”
There are, in fact, exhaustive steps and a series of checks and balances to ensure that every single share of their gold ETF is backed by the metal in the vault.
As ETF Securities is uniquely independent, all the gold purchases by the rust are made by third parties and never by the trust or related entities. The gold is then delivered by these third parties to the trust’s custodian. This means that the gold is always delivered by third parties and not bought by the trust. Investors always have the assurance that the gold is there from the start.
Bank of New York/Mellon oversees all movements of the metals in and out of the trust. When a creation or redemption in the fund is done, the physical metal is moved in or out and it can’t be moved unless the trustee approves it. That means no one can take gold (or any of the other metals) without the trustee’s approval.
“That’s happening on a daily basis,” Rhind says, as opposed to quarterly or semi-annually.
Twice a year, an external auditor comes in and goes through every single gold bar and reconciles it with the list of gold bars the trust says it owns. One such audit is done on Dec. 31, a second one is done at random at the discretion of ETF Securities. The custodian also conducts its own internal and external audits on top.
“There’s complete transparency in that audit process.”
As for how much of a chance there is that the gold in the trust could actually be destroyed, “It’s virtually impossible unless someone dropped a nuclear bomb.” In other words, the most extreme of extreme events.
Losing the gold is just as unlikely, given that it’s checked on a daily basis and it doesn’t move.” There’s absolutely no reason for that gold to be moving around the vault,” says Rhind. “It can’t be lent out to any third parties.”
No share of an ETF is issued before the corresponding gold is in the vault and accounted for. “You never want to be in a situation where there are shares created but the shares are not backed by gold,” he says.
Commodities on Fire
Because they’ve noticed increasing interest on the part of individual and institutional investors, Rhind and ETF Securities are bullish on the growth of the commodity segment of the ETF industry.
“We’re seeing a rebalancing of investment portfolios that were once purely made of equities and bonds. As our assets under management grow, that’s purely reflective of that,” says Rhind.
He also believes that commodities are still at the tip of the iceberg, citing a recent survey by Schwab that shows that more investors plan to invest in both commodities and ETFs in the coming year. Thirty-six percent of respondents said that they planned to increase their ETF exposure; 18% said they planned to increase their exposure t commodities.
“It speaks to me that this is exactly what people want to invest at the moment.”
ETF Securities’ U.S. lineup is:
- ETFS Physical Platinum Shares (NYSEArca: PPLT)
- ETFS Physical Palladium Shares (NYSEArca: PALL)
- ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
- ETFS Physical Silver Shares (NYSEArca: SIVR)
For more stories about commodity ETFs, visit our commodity category.