If American investors didn't understand before the 2008 market downturn that a plain vanilla portfolio of stocks and bonds probably won't meet their long-term investment objectives, they've gotten the message by now. More and more, investors are looking for diversification by adding uncorrelated assets to the allocation mix. One sector that is generating keen interest is commodities, particularly precious metals: gold, silver, platinum and palladium.
Enter ETF Securities Ltd., an issuer of exchange-traded products that specializes in commodities, with global assets under management of some $17 billion. In mid-2009, ETF Securities became the first European exchange-traded commodity provider to enter the U.S. market. William Rhind head of the firm's sales and marketing, established an office in New York, and during the last six months, the firm has rolled out a platform of precious metals ETFs: Swiss gold shares (SGOL), silver (SIBR), platinum (PPLT) and palladium (PALL).
ETFS has a strong pedigree in commodities investing. The firm's founder and chairman, Graham Tuckwell, developed the world's first gold ETF in Australia and London in 2003. ETF Securities also launched the world's first oil exchange-traded commodity in 2005 followed by an entire platform of exchange-traded commodities, which were listed on the London Stock Exchange in 2006.
"We're trying to replicate the successful formula in Europe for providing platforms for investors-not trying to cherry-pick what's the hottest commodity right now and bring it to market, but rather to give a full-service offering," says Rhind. "So, precious metals as a sector, and then follow that up with other sectors. We're in registration [with the Securities and Exchange Commission] currently for a basket product, a mix of gold, silver, platinum and palladium in one ETF that will round out our precious metal sector exposure."
Since opening in New York, the firm has raised more than $1.2 billion, says Rhind. "This speaks to the popularity of precious metals, and to the strategies we've implemented in terms of focusing on our investors and ensuring they understand the products and markets they're investing in and being clear in our messaging and clear on our goals in the U.S.: We want to be the biggest commodity ETF provider here."
A Compelling Investment
A big part of Rhind's job today is to educate American investors about the gold, silver, platinum and palladium markets. "We've found that financial advisors in this country have very low awareness levels in terms of commodity investing, especially precious metals," he says.
But that's changing as investors increase allocations to precious metals in an effort to diversify. "This is a game-changing shift into precious metals investing," says Rhind.
Precious metals have a compelling story, says Nicholas Brooks, ETFS's London-based director of research. He points out that they have historically had a low correlation to the returns of equities and bonds. That's a good thing for a long-term investor, because it means that during periods when equities may be doing poorly, precious metals may be doing quite well. Conversely, when equities are doing well, precious metals may not shine.
"The bottom line is: Diversification reduces the volatility of a portfolio made up primarily of equities and bonds, and therefore improves the risk-adjusted return," says Brooks.
When returns are adjusted for volatility, the Sharpe ratio of a portfolio composed of a basket of equities, bonds and precious metals tends to do much better, based on historical data, than one made up of just equities and bonds, he says.