Chris McMahon, editor of the John Lothian Newsletter - Metals Edition, speaks with Fred Jheon, head of product and business development for ETF Securities, about the company's physically backed commodity ETFs, the possible imposition of spec limits on the metals markets and other topics.
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CM: How might the proposed spec limits affect the ETF products and how they trade?
FJ: The products that we have, we have four physically backed products: gold, silver, platinum and palladium, and currently those products are using physical bullion, so they are not within the scope of the spec limits that are currently being considered by the CFTC. The good news about our products is that they are physically backed and don’t use any derivatives or synthetics, like futures. It’s really those instruments that are within the scope of the CFTC spec limits.
CM: Do you see them driving more volume to ETFs?
FJ: I think the best structure for commodity products is having then physically backed. So in the case of precious metals, having these precious metals stored in secured vaults, either in London or Switzerland, really makes the product a much better product from a safety perspective as well as to the investor who wants to get pure exposure rather than synthetic exposure.
CM: Futures brokers claim that futures are more liquid and transparent than ETFs, what do you think the differences and advantages of ETFs over futures are?
FJ: These products are physically backed, so you are getting exposure as an investor to the spot price, meaning that the spot price is disseminated on a daily basis. And what the investor gets in return for the shares is the performance of that spot price. Now if you flip over into a product that utilizes derivatives, like futures, it’s not the spot price, it’s usually the next month contract in the case of certain commodities and with that you can run into some wide spreads based on the contango or backwardation of the underlying future. As an investor, you are not getting the actual exposure to the future or even the spot price of the commodity.
CM: Is there is a business or marketing strategy to respond to that perception? Remember, I’m here in Chicago, inside the Board of Trade. Maybe that’s not a big deal, but maybe you can expand on this for me?
FJ: The marketing strategy that we have for our products is that they have no credit risk. They are tracking the spot price of the underlying metal. They are transparent, we actually publish the bar list for the underlying metal on our website. Investors can go to ETFSecurities.com and get what the bar numbers are for the underlying product. If they are in silver they can go and look at the silver bars. If they are in gold, they can go and look at the gold bars and that gives a lot of piece of mind to the investors when they are investing in these products. I think once you stray away from that, and look at future based, then for the average investor, understanding how the product is priced, the roll schedules and what you are actually getting in return, gets a little bit more complicated. So, to your question about marketing, there’s a compelling reason as to why to get into the physically backed products that we have.
CM: If I buy an ETF, the bars that I am buying the security on have individual numbers and I own those specifically, is that right?
FJ: Yes. Each of our products, depending on which product you are invested in, is -- let’s take for example gold. Each share represents 0.1 ounces of gold, less expenses. So, at the trust level, we publish what the trust holds in terms of physical bullion on our website. So yes, you can actually go and check into the bar figures.
CM: Do people take physical delivery then?
FJ: No. As an investor you are not going to take physical delivery, but at the authorized participant level what they do is deliver in metal and get shares in return on creation, and then on redemption they are going to deliver in shares and get their metal back.
CM: So, as an individual investor, I never take physical delivery?
FJ: That’s correct. We have heard requests on that front as well, but as a retail investor, if you were to take deliver of the metal and say it got delivered to your house, and its not only risky from a holding-the metal perspective, but once gold gets outside the chain of custody, then having to get that valued, or redeeming that gold, becomes an onerous process because you have to get it reassayed and then recertified to make sure that it’s a good-delivery metals.
CM: Where are the vaults?
FJ: For Silver, it is held London. For our gold product, it’s held in Switzerland. They are held in secured vaults in Switzerland, which is why we call it the Physical Swiss Gold Trust. And for platinum and palladium, they are held Switzerland and in London.
CM: I thought the platinum and palladium were an interesting choice for you guys. They are perceived as very small markets. Maybe you can explain the interest and the appeal, not just for investors, but on your side for having launched these products.
FJ: Sure. I think for platinum and palladium, we have heard a lot of investor demand prior to listing those two products. We started the business with silver, then gold and there was a fair amount of pent up demand for platinum and palladium. And once we launched the product in early January, we saw, at least in the initial weeks, we saw quite a bit of assets coming through the door. Currently we have about 600 million in [assets under management] in book in both products. And I think it’s just testament to meeting that investor appetite to gain exposure into platinum and palladium. From an investor perspective, one may want to go into those metals because it’s almost like a hybrid security where it has investment characteristics similar to gold, where you are hedging against inflation and so forth, but it’s also a way for investors to play the economic cycle. And as you know, platinum and palladium are used heavily in auto catalysts. So if you have a bullish view on the automotive industry, getting into platinum and palladium is a great way to do that.
CM: They also use platinum and palladium in the oil refining process, but I haven’t seen that in the press.
FJ: There is wide application in the catalytic convergence process. I am not too familiar with the oil per se. but certainly in the automotive industry, both metals are widely used.
CM: ETFS has more products in London than in the U.S. Are all of them physically backed?
FJ: No. In London, we have over 180 different products and we slice and dice the commodity markets as well as some of the equity markets pretty widely. Not all are physically backed. Most of the physically backed products are only tied to the precious metals. So we have gold, silver, platinum and palladium and we have a basket of all four in London and those are all physically backed. The rest are derivative based, so they are using derivatives to gain the exposure. And it kind of makes sense, because if you think about some of the other commodities out there, like corn or soybeans it is difficult to store, so getting exposure at the spot level is much more difficult.
CM: We are constantly told that these are global markets. But does the gold that trades in the U.S. markets trade differently than the ones out of London.
FJ: No, in terms of what they are tracking, it’s exactly the same. So, whether it’s our product or our products in London or even competing products here in the U.S., on the physically backed side, they are all tracking the London PM Fix price, which is disseminated daily by the LBMA, and that’s sort of the benchmark it you will for the underlying metal.
CM: What’s the one thing you want people to know about ETF Securities?
FJ: We are leaders in the commodity space and one thing that we’d like investors to know is that we are entering the U.S. market at an opportune time, where there is a lot more attention being paid to commodities investing. We are the only providers here in the U.S. that have a full platform of physically backed precious metals, so we now have silver, gold, platinum and palladium. And we have another basket backed product under registration, so I think our first step in providing commodity products is very good and going forward we intend to expand that product line, similar to how we provide overall commodity exposure in our European business.
CM: Can you tell me more about the basket?
FJ: It is under registration and we hope that we can come out with that product fairly quickly.
CM: Where were you before ETFS?
FJ: I have been at ETF Securities for a year and a half now, and it has been a tremendous ride up till now. Prior to this, I was at Barclays Global Investors, BGI. Now called Black Rock and I was responsible for product development as well as portfolio management over there for eight years.
CM: How did you know that you wanted to get involved with the markets?
FJ: I always was interesting the investment management area, but getting into ETFs was a little bit of luck. When I first joined BGI, it was a very small sort of business venture and ETFs were nowhere near where they are today. It was really just good timing that I was working on the strategy and it happened that ETFs just exploded and it’s the product of choice, as you can see from the movement of the mutual funds into ETFs and so it is all history from there. The breadth of products that we see now in the market is great compared to where it was 10 years ago. Obviously the assets. As an industry, it has growth tremendously and is continuing to grow and there are also a lot more players. People are being much more innovative in terms of how they are structuring and what type of products they are covering so it is really an exciting space to be in.
CM: What did I forget to ask you?
FJ: Certainly another thing that investors are very curious about is: what is the cost of these products compared to what they can get in the market. And another key marketing point that we tell investors is that not only are we giving you the full service of support the education, the research, but also we happen to be the lowest priced products out there in the market currently in the U.S. Silver is at 30 basis points; SGOL is at 39, both being the lowest products in the U.S., and platinum and palladium, and these are the first of its kind in the U.S. and yet when you compare them to derivative based products, they are still cheaper at 60 basis points each.
Monday, March 8, 2010
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