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What's New for the Platinum and Palladium Lovers


Two new precious metal ETFs begin trading.

Investors have a new way to track the price of precious metals: ETF Securities has now launched the first US physically backed platinum and palladium exchange-traded funds.

Shares of the two new funds -- ETFS Physical Platinum (PPLT) and ETFS Physical Palladium (PALL) -- started trading Friday on the New York Stock Exchange's Arca Platform. Both products have an expense ratio of 0.60%.

The new listings come from the same management team that created ETFS Physical Swiss Gold Shares (SGOL) and ETFS Physical Silver Shares (SIVR) in 2009.

Given the surging demand for precious metals through commodity ETFs, it isn't surprising that firms such as ETF Securities are launching such products, says Paul Justice, the associate director of ETF research at Morningstar.

He points out, for instance, that the SPDR Gold Trust (GLD) is now the second-largest ETF on the market with $40 billion in assets. It took in $11.12 billion in just 2009.

Unsurprisingly, companies are looking for ways to capitalize on all this enthusiasm for the precious metals, says Justice.

"They have seen a lot of success in gold and silver funds," he tells us. "They see a lot of appetite for precious metals. ETFS wants to really become an all encompassing fund provider in the US. I think you will see that lineup will grow even further."

As for these new platinum and palladium exchange-traded funds, Justice says he's guessing that ETFS could generate enough investor enthusiasm to make the funds profitable.

"I wouldn't be surprised to see these being $100 million funds," he says.

More importantly, who should be committing capital to such vehicles?

Given their narrow focus, Justice says the exchange-traded funds are better suited for traders: those with short-term, tactical ideas about where the prices of the two metals are headed.

"These don't make for sound investments, as in something you buy and hold forever," Justice says. "They are useful from time to time, but I wouldn't recommend putting them in a portfolio that you will hold for several years."

He concludes, "You can get a broad basket commodity fund that will provide you with commodity exposure, from an asset allocation perspective, for a much lower price tag. For most investors, that will fill all the need they will ever have in commodities."

If you're hunting the market for such a vehicle, Justice has a recommendation to think about: the iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP).

"It covers 20 different commodities all in one nice little package for a low price," he says.

Neil Meader, research director at GFMS, a London-based precious-metals consulting firm, points out to us that demand for platinum, which is used in autocatalysts that clean up car exhaust, suffered in 2009 due to the slump in car production.

However, Meader and his team forecast that trend reversing this year.

"We should see a notable recovery once the car production gets back on track," he says.

This week, Ford (F) reported a 33% sales gain in December. Meanwhile, according to the Associated Press, China overtook the US as the biggest auto market in 2009 and an industry group told us to expect more strong growth this year.

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No positions in stocks mentioned.
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