McCall’s Call: All That Glitters Is Not Gold

September 22, 2010

Platinum And Palladium

While both gold and silver have made big moves this year, neither one can match the 33 percent gain in the price of palladium. Platinum is up 10 percent and lagging its peers, but greatly outpacing equities.

There are three exchange-traded products (ETPs) that give investors access to the platinum sector. What’s amazing about this niche sector of ETPs is that all three products vary in the manner they track the price of platinum.

The iPath Dow Jones Platinum ETN (NYSEArca: PGM) invests in one futures contract that tracks the price of platinum. As the contract is expiring, the ETN must roll out the contract and purchase a new contract. The annual expense ratio is 0.75 percent. Year-to-date the ETN is down 1 percent.

The E-TRACS UBS Long Platinum ETN (NYSEArca: PTM) measures the collateralized returns from a basket of platinum futures contracts. The platinum futures contracts are targeted for a constant maturity of three months. The expense ratio is 0.65 percent and PTM is up 4 percent in 2010.

The ETFS Physical Platinum Shares (NYSEArca: PPLT) differentiates itself because the shares are backed by actual platinum and therefore will track the spot price of the metal, less expenses. The ETF’s expense ratio is 0.60 percent.

As of today, my firm owns a small amount of PTM, the platinum ETN, for clients and we’re looking to increase our exposure to the precious metal. Because PPLT wasn’t available when we originally purchased PTM, we’ll now look to PPLT as the best option for exposure to platinum due to the manner in which they track the metal, and the expense ratio.Investing in the big winner of 2010, palladium, can be achieved in one of two ways. The ETFS Physical Palladium Shares (NYSEArca: PALL) is similar to PPLT, in that the ETP is backed by actual palladium and therefore will track the spot price minus expenses. The expense ratio is 0.60 percent.

The First Trust ISE Global Platinum Index Fund (NYSEArca: PLTM) is composed of a basket of platinum-related stocks from around the globe. The ETF charges an expense ratio of 0.70 percent and has struggled to gain any momentum as the underlying metal has performed well.

Building A Precious Metals Portfolio

I can make a case to own all four precious metals highlighted in the article. The problem is that most investors do not have an unlimited bankroll and must decide where to put their money.

At this time the average investor might consider allocating about 10 percent of their portfolio to precious metals. Of that 10 percent, they might allocate 4 percent to gold, 3 percent to silver and the remaining 3 percent to PPLT.

Palladium is left out only due to limited funds and the fact that it has already made a big run, and I feel platinum is due for a breakout and rally in the coming months.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.

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