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Where do I find information on commodities backed ETFs?

I'm specifically interested in platinum and palladium. And in the case of a metal like this, is it better to invest in an ETF that is backed by the physical metal over one that is not backed? Or does it not really matter?

Thanks for your help.

Jun 06, 2012 by Rainer from Chesterfield, MO in  |  Flag
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Hi Rainer,

Most commodity ETFs use futures contracts. The custodian typically manages the fund so you should not lose more than your investment (which is possible investing directly in futures) and mimic current prices as much as possible. That said, commodity markets, and their futures markets, can be quite volatile, and it holds true for metals as well.

In the case of an ETF holding an actual metal, again you have the volatility associated with commodities. There are other issues associated with holding the physical metal. As the website for a fund that holds physical palladium (PALL) says: "There is a risk that part or all of the Trusts' physical precious metal could be lost, damaged or stolen. Failure by the Custodian or Sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trusts could result in a loss to the Trusts. Since there is no limit on the amount of platinum and palladium that the Trust may acquire, the Trust, as it grows, may have an impact on the supply and demand of platinum and palladium."

Another risk is implied value of a metal such as platinum or palladium. Certainly there are some industrial uses for platinum and palladium (catalytic converters, coinage, cancer treatments, surgical uses, etc.). If you feel these uses for the metals will continue to grow (understand researchers will continually look for less expensive alternatives) then this may be a good consideration as part of your asset allocation. However, a portion of the metals' value comes from people's perception of the value of the metal as a collectible (e.g. jewelry). If tastes change, this could adversly affect pricing. This change in the metal's price will affect your ETFs, whether you are holding actual metal or one that uses the futures market. Good luck.

Comment   |  Flag   |  Jun 06, 2012 from Permanente, CA

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Rainer, http://etf.stock-encyclopedia.com/category/commodity-etfs.html has more than 100 Commodity ETFs listed. Then use Yahoo Finance to read more. We trade Commodity ETFs in our Adaptive Asset Allocation strategies. Call me, if you're interested in how to trade them stategically.

Comment   |  Flag   |  Jun 07, 2012 from Wayne, PA

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George Cones, JD Level 20

When investing in commodities, especially precious metals, be very careful. Commodities, if one is not in the relavant business (agriculture, mining, energy, etc.), are pure speculation. Many of the wild claims you hear about gold, for example, would not be possible if the market was regulated like the securities market.

Did you know that if you bought gold near its recent high of about $1,800 oz, as of today you would have lost about 15%, and you could lose a lot more. You could make money as well, but gold has only returned in the low single digits if you held it over the last several decades.

Physical gold presents a number of challenges, such as storage and a liquid market (unless you are a jeweler). The same holds true for other commodities. You may want to consider an active manager who buys stocks in commodity driven companies, like mining and precious metals mutual funds (Vanguard has a couple). At least a lot of these companies pay dividends. Besides not paying dividends, physical metals don't procreate, so you aren't going to have any more of the metal than when you started.

An investment in a fund or ETF that uses derivities to leverage its positions could cost you dearly (or make you a lot of money). Risk is a two way street. For those of us who have been around the block, the average investor who invests in a provervial gold mine often winds up with the shaft.

Comment   |  Flag   |  Jun 07, 2012 from Wilmington, DE

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I believe commodities deserve a place in the asset allocation. But you also need to be aware of some key issues. Do your homework or ask for help. Some key issues are:

1) underlying sectors - even broad commodity index differs, especially the % to energy 2) implied carry of futures - if futures contract upward sloping (contango) need to have manager actively managing 3) if use mutual fund format, what asset class is fund investing excess dollars not used for futures margin 4) if you value active mgt for this asset class, look to mutual funds that specialize 5) some commodity funds are actually stock funds investing in companies related to commodity business

Comment   |  Flag   |  Oct 06, 2012 from Western Springs, IL

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Ranier, For starters,some of the product providers have fairly decent websites. Try iShares for a start. There are risks with both. Asset backed commodity products will prevent some of the exposure to cantango risks, but can be more expensive due to the carrying costs related to owning the physical asset. Brokerage costs, storage costs, transportation and protection of the assets are all going to add up. Not to mention it can be completely impractical for something like oil. Jeff did a good job explaining the exposure to cantango risks with futures based products. The bigger question I would ask is why you would want to take such a specific risk in an individual commodity. Such speculation can be very risky and ultimately may work against you.

Comment   |  Flag   |  Nov 29, 2012 from Denver, CO

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Hi Rainer, Here is a link to Dr Kenneth French's ( a renowned economist) opinion on commodies.http://www.dimensional.com/famafrench/2010/11/what-role-for-commodities.html His PHD dissertation was about investing in commodities. He views them as a zero sum gain because commodity contracts expire and are worth nothing when they do so. There is also a video on the site where he discusses his findings.

If you do decide to invest in commodities remember they are very volatile and even if a particular commodity goes up in value the commodity ETF may actual lose money. Partly because of contango backwardation. Which in English means; When the futures price is above the expected future spot price. Consequently, the price will decline to the spot price before the delivery date.

Read more: http://www.investopedia.com/terms/c/contango.asp#ixzz1xDE3Rmpe

Comment   |  Flag   |  Jun 08, 2012 from Cleveland, OH

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