PALL Abrdn Palladium ETF Trust

Auto sales are finally getting back on track after suffering a major setback during the recession of 2008. The Big Three Detroit automakers, who command a huge share of the U.S. auto market, have bounced back with the help of a gradual recovery in the global market, restructuring of their product portfolios, strong pent-up demand and cheap financing.

Besides, higher average age of cars on U.S. roads (more than 10 years) and an improving unemployment rate have been the key factors in driving auto sales in the U.S. despite the rising gasoline prices. In fact, in November 2012, U.S. auto sales reached its five-year high by registering 15% growth to 1.14 million sales in vehicles. The good news came on the heels of a Sandy-wrecked October suggesting that a long-awaited optimistic outlook may finally be here.

With the recent uptick in Auto sales, some allied sectors, especially metals like palladium and platinum should also be in high demand (see Why You Don't Need Both the Palladium and Platinum ETFs). It would thus be prudent for investors to tilt their portfolios towards these sectors.

Automotive Recovery to Benefit Price of Palladium and Platinum

The Automotive industry always acts as a catalyst for the increase in prices of palladium and platinum. These metals find use in vehicle exhaust catalytic converters to manage vehicle emissions.

Thanks to the regulation on emission from diesel engines in Europe, U.S. and Asia along with increased demand for vehicles, ETFs like ETFS Physical Palladium Shares (PALL) and ETFS Physical Platinum Shares (PPLT) should stand to benefit from an eventual ramp up in pricing in 2013.

Both the funds are traded in the form of shares and are designed to reflect the prices of the respective metals, plus accumulated interest, less the Trust’s expenses. The two metals are securely stored in London and Zürich on behalf of the custodian, JP Morgan Chase Bank and both PPLT and PALL currently carry a Zacks Rank #2 (Buy).

Let’s take a closer look of some of the key fundamentals for both of these ETFs below and how they stack up in the broader fund market:

ETFS Physical Platinum Shares (PPLT)

Launched in August 2010, this passively managed exchange traded fund seeks to replicate the performance of the spot price of platinum (See Platinum ETF Investing 101).

The ETF has more than $8.0 billion in assets and trades in volumes of around 68,465 daily. PPLT is a low-cost choice not only in the platinum family of ETFs but also costs less than holding physical platinum thanks to a tight bid ask spread. The product charges a ratio of 60 basis points.   

ETFS Physical Palladium Shares (PALL)

Launched in August 2010, PALL seeks to gain exposure in palladium (See Zacks #1 Ranked Precious Metal ETF: PALL). The ETF amassed more than $4.7 billion in assets and trades in decent volumes, roughly 70,000, on average. Like PPLT, this ETF also charges a modest expense ratio of 60 basis points.

The Bottom Line

Both the products are paying off quite handsomely. While in the last one-year period, PALL’s return of 10.71% has outperformed PPLT (2.30%) by about 840 basis points, we are seeing a reversal in trend since the beginning of the New Year.

In the YTD period, palladium returned around 4.13% while platinum delivered 14.24%. Probably, this is due to supply concerns for platinum in key markets like South Africa.

The recent South African mining strikes will keep its supply range bound as it is a scarce metal. Apart from an easy year-over-year comparison, the supply crunch could be another reason for the fund’s recent rally.

On the other hand, while being far more volatile than its platinum counterpart, palladium is more responsive to the rebound in the automotive sector. Manufactures sometimes substitute the requirement of higher-priced platinum with this lower-priced metal. Again, palladium’s advanced durable nature also makes it a better alternative for some aspects of the automotive process.

Prices of metals like palladium and platinum were hard hit during the economic recession owing to muted industrial activity. Both PALL and PPLT are currently trading below their respective 52-week highs.

Yet, we may take advantage of their undervalued situation and invest in these metal ETFs, particularly at a time when the auto sector is revving up and supply concerns suggest a bullish trend for 2013.

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ETFS-PALLADIUM (PALL): ETF Research Reports
 
ETFS-PLATINUM (PPLT): ETF Research Reports
 
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