Precious metal investors finding profits in palladium ETFs

Nov 28th, 2017 | By | Category: Commodities

Palladium-tracking ETFs, such as the ETFS Physical Palladium (PHPD LN), are amongst the top performing ETFs thus far this year (as of 27 November 2017), following a nearly 50% rise in the metal’s price year-to-date.

Precious metal investors find profits in palladium ETFs

Precious metal investors have found large profits in palladium ETFs in 2017, as the metal’s price has increased by almost 50%.

Palladium is closely linked to the fortunes of the global car market – 80% of total palladium production is used in the manufacture of catalytic converters used to reduce harmful emissions in combustion engines.

The relatively constant demand from the car production industry helped palladium avoid the worst of the protracted bear market in commodities, which saw the ETFS Physical Gold (PHAU LN) lose a third of its value between January 2012 and December 2015.

Having traded sideways over this period (albeit with significant volatility), the start of 2016 marked a new course for the metal’s fortunes – PHPD rose 38.8% over that year. Its bullish run has continued throughout 2017 thus far.

Source: ETF Securities.

Palladium is benefiting from tighter global emissions standards – major European cities including Paris, Munich, Oslo, Madrid and Athens have introduced, or are planning to introduce, bans or higher taxes on the vehicles.

In California and a number of other “green” states, regulations are being brought with the aim of reducing fleet average emissions by 70-80%. LEV III regulations will be implemented between 2015 and 2025 model years and Federal Tier 3 will be rolled out between 2017 and 2025.

The metal is also enjoying support from a shift in global consumer sentiment away from diesel engines following heightened awareness about the levels of pollutants that these engines produce. This trend has been compounded by the Volkswagen emissions scandal, which broke in 2015.

The question now on investors’ minds is: can the rally continue?

Investors in Palladium are advised to monitor the global car market closely for signs of changing demand levels. A slowdown in the US or China, in particular, could negatively affect the metal’s outlook, while the greater availability of more environmentally protective engines, such as electric motors, also pose a threat.

Palladium also remains a relatively small market, making the price vulnerable to high volatility caused by speculation. Speaking as far back as June of this year, Nitish Shah, director, commodity strategist at ETF Securities, was cautious on the metal’s outlook. Despite acknowledging strong medium-term fundamentals supporting Palladium, Shah noted that speculative positioning looked “stretched”, and there “could be better entry points into the metal once it becomes less of a crowded trade.”

Investors who bought the metal in June, however, would have received a return of 21.5%, as of 27 November.

Regardless of the metal’s outlook, precious metal ETFs can play an important role in investors’ traditional stock/bond portfolios for the risk/return improvements possible from diversification. Investors typically turn to gold ETFs for this due to the yellow metal’s safe-haven qualities during serious market downturns; however, palladium ETFs may be attractive to investors looking to extend their portfolio beyond exposure to gold. Metals are also traditionally seen as a good hedge against inflation.

PHPD is the largest ETF in Europe to track the price of Palladium. It currently has $133m in assets under management (AUM) and a total expense ratio (TER) of 0.49%. The iShares Physical Palladium ETC (SPDM LN) and the Source Physical Palladium (SPAL LN) are both cheaper with TERs of 0.40% and 0.39% respectively; however, both funds have struggled to attract significant AUM.

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