Updated 7th December 2010

Two physically-backed platinum and palladium exchange-traded funds, or ETFs, were launched in the first half of 2007 in Europe. Exchange-traded funds exist in a wide variety of commodities, including gold and silver, and are constructed to allow investment into specific commodities without the investor having to take physical delivery or enter the futures markets. Investors can buy shares in these funds which are equivalent to a specific weight of either platinum or palladium and the performance of these shares replicates the performance of that metals price (less any management charges).

Since the funds are physically-backed, when a share is created, an equivalent amount of metal must be deposited with the fund. This metal is allocated and this has the effect of taking this metal off the market. This can have the impact of reducing liquidity in the market and of increasing price volatility, particularly as the metal cannot be loaned out. This is in contrast to products such as Exchange Traded Notes (where the shares are not backed by allocated metal).

Since the launch of these funds, there have been clear differences in the behaviour of investors in the palladium and platinum funds. Almost 200,000 oz of platinum had been accumulated by investors by the end of 2007 and a further 100,000 oz was held at the end of 2008. However, purchases and sales of ETF shares have been highly correlated to movements in the metal price, particularly for platinum: investors have bought heavily at times of rising prices, adding to the upward pressure on the price, and sold heavily as the price fell, exacerbating the fall in the platinum price by adding liquidity to the market in the second half of 2008. Platinum holdings peaked at almost 500,000 oz in the middle of 2008 before declining to end the year close to the 300,000 oz level. As the price recovered in 2009 it attracted back ETF investors, taking holdings to a record level of some 680,000 oz at the end of 2009.

Investors in the palladium funds have typically accumulated metal with much less regard to short term price performance, perhaps with a view to holding a longer term investment. They held roughly 280,000 oz of metal at the end of 2007 and this total grew to roughly 680,000 oz at the end of 2008, showing continued investor appetite. A burst of activity in the early months of 2009 was followed by steady buying, taking metal holdings to 1.17 million oz at the end of the year. This includes a small amount of metal (below 5,000 oz of each metal) held in two Australian funds launched at the start of 2009.

In August 2009, ETF Securities launched physically-backed platinum and palladium Exchange Traded Funds on the Tokyo Stock Exchange. These are cross-quoted versions of the existing London funds with the metal held in Europe. ETFs in other materials (such as gold) already exist in Japan so ETFs are not entirely new to Japanese investors. Moreover, Japan has a long history of consumer investment in platinum (through futures contracts, physical bullion and through accumulation plans). A reasonable amount of investor interest might therefore have been expected. However, to date, buying interest has been relatively limited.