When the market is particularly unpredictable, some investors like to invest in physical assets. The Standard Bank Africa Palladium ETF combines the emotional comfort of investing in a physical asset with the ease of buying a share.
Palladium is a precious metal used to produce catalytic converters in cars. It’s also used in the medical, dental and electronics industries. Unlike gold, the metal’s real world usefulness means it is in demand across the world. South Africa produces a large amount of the world’s palladium, putting local investors in a good position to capitalise on that demand.
Physical commodity ETFs differ from ordinary ETFs in one important way – you only get exposure to one thing. This removes much of the built-in diversification inherent in equity ETFs like a Top 40 product. While ordinary ETFs buy shares in the companies featured in the ETF, this product buys 1/100th of a troy ounce of palladium. The physical metal is stored for each ETF unit sold. Buying 100 shares in this ETF therefore makes you the proud owner of 31g of precious metal.
The physical investment means the ETF is not subject to market movements, like companies are. The performance of the ETF is influenced by the price of palladium, which, in turn, is determined by supply and demand for the physical metal. When the global palladium price rises, so does the value of the ETF shares.
Unfortunately this means there’s no money outside of price movement to be made from this ETF. Investors can’t earn interest or dividends, so it isn’t suited to income-investors. Because it’s invested in a physical commodity, you also can’t buy this ETF in a tax-free savings account.
Weekly expert: Warren Ingram
Each week, we ask an independent industry expert to tell us more about our featured ETF. This week, Galileo Capital’s Warren Ingram helps us understand this ETF better.
What sets the Standard Bank Africa Palladium ETF apart from other ETFs?
The Palladium ETF is an investment that is based on the physical holdings of palladium in storage vaults. This means investors have actual ownership of a physical asset rather than a right to the price movement of a commodity which is what happens with comparable ETNs. Investors who want the ultimate security of ownership, this ETF is the better route.
What limitations should investors be aware of?
This investment generates no income (no rent, dividends or even leasing income) so the only way to make money is by an increase in price. The manager also charges a management fee of 0.35%, so if the rand price of palladium remains stagnant, you will lose money over time.
What type of portfolio would benefit most from holding this ETF?
Very large investors seeking diversification or those who are predicting a near collapse of financial markets could benefit from this investment.
Unpacking the Africa Palladium ETF
|ETF name||Africa Palladium ETF|
|ETF issuer||Africa ETF Issuer|
|Issue date||24 March 2014|
|ETF benchmark||Palladium spot price|
|Tax-free savings account||No investment allowed|
|ETF major holdings||Palladium|
|Performance||1 year +11.3%
3 year +78.9%
Since inception +79.4%
|What we like||The ETF provides an alternative to investors who feel safer investing in physical assets.|
*17 May 2016