(Dow Jones) With exchange-traded funds that own the precious metals platinum and palladium becoming bona-fide hits, investors may start to wonder if these funds could prompt the kind of regulatory concerns about speculators that have plagued energy funds.
In fact, the metals funds have a major design advantage over the types of funds that have come in for scrutiny, but investors shouldn't totally discount the risk.
On the market for only about three weeks, the ETFS Physical Platinum Shares and ETFS Physical Palladium Shares have already garnered more than $500 million, with expectations about the demand they represent helping to drive platinum and palladium prices to 12-month highs last month.
Prices have slipped a bit in the past two weeks but, if ETFs appear to be making the metals more expensive for companies that use them to make goods such as catalytic converters, they could draw the eye of regulators. That's what happened last summer when worries about energy prices prompted oil and natural gas ETFs to stop issuing new shares, distorting prices for investors that traded them.
To be sure, metals markets aren't as politically volatile as energy prices, which many Americans see every day at the gasoline pump. However, the Commodity Futures Trading Commission, the agency which has taken the lead on targeting energy speculators, has suggested it may look into metals in the future. Moreover, one of the forerunners of the platinum ETF, an exchange-traded note issued by Barclays Capital that tracks a platinum-futures index, "temporarily" suspended issuing new shares in October and has never resumed.
A key reason that curbs on the platinum and palladium funds seem unlikely is that, unlike energy funds, they own actual amounts of physical metals, not futures contracts tied to the metals. This puts them outside the jurisdiction of the CFTC, the regulator that has taken the lead on curbing commodity speculation. (The Barclays Capital ETN is a debt security and doesn't technically own futures or metal, but most investors believe Barclays uses futures markets to offset risks associated with the product.)
Gold and silver ETFs, like the platinum and palladium funds, own actual metals and have been allowed to grow toweringly large. The gold fund has $40 billion. Still, because the platinum and palladium markets are much smaller than the one for gold, regulators could be more likely to take action.
If regulators did decide that the new funds needed to be reined in, they would have at least one conceivable avenue: As with other commodity ETFs, the platinum and palladium funds must periodically ask the Securities and Exchange Commission for permission to issue new shares, a step both funds have already taken because of their popularity.
In theory, the SEC could withhold this approval if it grew concerned about the funds' operations. That seems unlikely at present but it can't entirely be ruled out.
"It's not the SEC's role to care about people speculating in commodities," William Rhind, head of sales for ETFS Marketing LLC, which created the platinum and palladium funds, said in a recent interview. Added Rhind: "Touch wood."
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