A platinum ETF (exchange-traded fund) is a popular and convenient way of investing in platinum. The ETF is traded on stock exchanges in the same way as stocks. Some investors call it 'buying shares in the platinum price'.
A commodity ETF buys a commodity like gold or platinum, and the value of the ETF is the net asset value of the commodity it holds. For instance, if the price of platinum rises by 0.1%, the value of the platinum exchange traded fund also rises by 0.1% instantly.
The ease of investing in different commodities through an ETF makes this the most popular kind of exchange-traded product. Most ETFs are index funds, but some actively managed ETFs do exist. The platinum price is used as the index for platinum ETFs and ETNs.
A platinum exchange traded fund is in essence a fund that holds a large amount of physical platinum and nothing else. The value of the ETF closely follows the value of the platinum it holds throughout the trading day. Investors buy shares in the ETF instead of buying physical platinum. Typically, one share of a platinum ETF is entitled to 0.1 ounces of platinum.
Buying into an ETF is probably the most convenient way of investing in platinum, because there's no need to hold physical platinum and it's easy to buy and sell an ETF. These securities incorporate limit orders, short selling and options, and thus have the same features as an ordinary traded stock. That is one of the main advantages of a platinum ETF.
ETFs are similar to mutual funds in the way they are valued. A mutual fund is valued for the value of the stocks that it holds at the end of a trading day, while a precious metal ETF is valued for the metal that it holds at any time. But while mutual funds can only be traded at the end of the day, an ETF can be traded at any time during the trading day.
Advantages of a platinum ETF
- No need for the investor to hold physical platinum. Buying platinum in bullion can be cumbersome and inconvenient. Transport and storage of the metal will eat into any profits made from the investment. Some investors prefer to hold physical metals, but by far the most popular and convenient way to invest in platinum is by buying an ETF that's focused on platinum.
- Easy to buy and sell, features like any stock on the stock market. Because of its structure, ETFs are easy to buy and sell through your ordinary brokerage account. It is also possible to sell short, trade with options and use limit orders, as well as use other features that are associated with ordinary traded stock. This ease of use is one of the reasons why ETFs were launched in the first place.
- Can be traded throughout the trading day. Mutual funds can only be bought and sold at the end of the day, but ETFs behave much like common stock and can be traded at any time while the exchange is open.
- Closely tracks the price of platinum. The whole point of investing in a platinum ETF is to invest in the platinum price. ETFs own physical platinum, and the price of each share in the ETF follows every rise and fall in the platinum price very closely.
- No minimum investment. Because it is traded like a stock, you can buy single shares of an ETF. That investment is usually low enough for most investors to meet.
- Low management expense ratio to cover the cost of managing the fund (usually lower than 0.8 %). Managed mutual funds often have high management costs - that's how the manager of the fund makes the money. Platinum and other commodity ETFs are more similar to index funds, in that the cost to manage it is very low, only fractions of one percent of the ETF value per year.
- Tax advantages. In general, ETFs are tax efficient compared to many other investments, because the value and the tax liability is only calculated when the exchange-traded fund is sold, due to a loophole in regulations. That postpones the capital gains tax to the final sale. The exact tax advantage for each investor depends on individial tax rates and other circumstances.
Disadvantages of a platinum ETF
- You don't actually own any physical platinum. The reason some investors buy physical metals like gold bullion is that they fear a cataclysmic global financial collapse. In that event, the banks that operate and own the ETFs may theoretically go bankrupt and take the ETF with them. The contracts underlying the exchange traded fund may then be liquidated and the ETF itself worthless. This has never happened and probably never will, because ETFs are usually secured by the largest banks. However, some investors (mainly those who foresee a future apocalypse and buy gold to hedge) feel very strongly about this issue and prefer to buy physical metal.
- The price of any ETF may temporarily stray from the net asset value if the demand for the ETF suddenly soars or falls. This happens all the time, but the variation in the price of the ETF with respect to the price of platinum is quite small. Larger deviations are very rare and have not yet happened to any extent with any platinum ETF. The difference in valuation between the ETF and the platinum price is usually negligible, but in extreme cases, the ETF may suddenly be worth a little less or a little more than the commodity itself. The difference returns to its normal magnitude within a short time, and is sometimes used by traders who bet that the value of the ETF will return to the same level as the commodity price.
- Futures contracts. Some commodity ETFs do not buy the actual commodity, but let the fund follow the commodity price by being involved in the futures market in complicated ways. This is not controversial in itself, but some investors don't like this aspect of some ETFs (in this case they are properly called ETNs, or exchange-traded notes). Platinum ETFs are usually physically backed, and the fund owns physical platinum. Which method the ETF uses is clearly stated in the name of the ETF; if it has the word 'Physical' in the name, it holds the actual metal.
How to invest in a platinum ETF
Investing in any ETF is as simple as logging in to your brokerage account, searching for platinum ETFs and deciding how much to buy. You can also buy ETFs that are short platinum, which essentially means that you're betting on the platinum price to go down.
The alternatives on the market today
These are the ETFs that you can buy at the time of this writing (January 2012):
Exchange-traded funds that are backed by physical platinum
ETFS Physical Platinum Shares (PPLT)
This is the largest and most popular platinum ETF, and has assets of $662 million as of this writing. It was the first physically-backed exchange traded fund that was focused on platinum, and is operated by ETF Securities, a pioneer in offering commodity ETFs. The expense ratio for this fund is 0.60%
At the time of this writing, this is the only physically-backed platinum ETF on the market.
Exchange-traded funds that are not backed by physical platinum
UBS E-TRACS CMCI Long Platinum Total Return ETN (PTM)
Assets: $36 million. Expense ratio: 0.65%. This ETN uses future contracts to track the price of platinum.
iPath Dow Jones-AIG Platinum Total Return Sub-Index ETN (PGM)
Assets: $36 million. Expense ratio: 0.75%. This ETN uses future contracts to track the price of platinum.
VelocityShares 2x Long Platinum ETN (LPLT)
Another ETN, this fund gives double leverage for the platinum price. That is, if the price of platinum increases by 1%, the value of the fund increases by 2%. Conversely, if the platinum price falls, the fund falls twice as much.
Inverse platinum ETNs
VelocityShares 2x Inverse Platinum ETN (IPLT)
This fund also has double leverage, but inverted. This means that an increase in the platinum price leads to the fund decreasing in value by a factor of 2. This provides investors with an effective way of shorting platinum.
E-TRACS UBS Short Platinum ETN (PTD)
This ETN uses future contracts to short the price of platinum. In other words, if the price of platinum decreases, the value of the fund increases. Investing in this ETN is a way of betting that the price of platinum will fall. Net value: $3.44 million. Expense ratio: 0.65%
Other platinum ETFs
It's also possible to invest in ETFs that track companies that mine platinum. First Trust ISE Global Platinum (PLTM) is an example of that. Net Asset Value: $7.4 million.
The price of platinum
Platinum is used in many industries, and is increasingly used for making jewelry. Many Asian consumers like jewelry that is made from platinum, and some consider it more precious than gold. This trend is particularly strong in China, which absorbs 75% of the platinum jewelry made.
The most important industry is the auto industry, which uses platinum in catalytic converters in the exhaust systems of modern cars. More than half of all the platinum that is mined every year is used in catalytic converters, along with palladium.
The relationship between the price of gold and the price of platinum is worth noting. Traditionally, platinum has traded at a considerable premium to gold. Gold was worth more than platinum in December of 2008, before platinum again rose above gold after a few days and powered up to a 130 percent gain for the next couple of years.
Before that, we have to look as far back as 1992 to see platinum trading for much less than gold. That's very rare, and platinum is normally worth more than gold – no wonder, as platinum is 30 times rarer and the industrial demand for the metal is very high. On average, platinum has traded approximately 64% above gold on average for the last decade. That is the normal state of affairs.
As of writing this in early January 2012, one ounce of gold is worth $1564, while platinum trades at $1395 an ounce. That's a 12% premium on gold relative to platinum. In other words, it takes only 0.89 ounces of gold to buy one ounce of platinum. One year before writing this, the relationship was normal, and platinum was worth considerably more than gold. While the price of gold fell towards the end of 2011, platinum fell even more.
It seems that platinum is currently badly undervalued relative to gold. In fact, the situation is unprecedented – the premium of gold is higher than it has been for many decades.
The price of platinum in the time to come
Does the current abnormal premium of gold over platinum mean that gold is overvalued, or that platinum is undervalued? Probably a little of both, but it mainly seems that platinum is far too cheap for the time being. A number of analysts feel that platinum will appreciate considerably in 2012 and the years to follow. Industrial demand is expected to rise by at least 5%, which the mining companies will have trouble meeting.
Industrial demand will drive the price, and analysts predict that demand will outstrip supply over the next five years.
The price of platinum is expected to rise in the years to come, as the demand for platinum jewelry increases and the automobile industry regains its strength.
All this means that this is a perfect time to invest in platinum, and the easiest way to do it is by buying shares in a platinum ETF.
More about the platinum price