From the December 2009 issue of Research Magazine • Subscribe!

December 1, 2009

Mindful of Metals

Fred Jheon of ETF Securities discusses trends in commodity ETFs and other investing strategies.

Fred Jheon is managing director and head of product development, U.S., for ETF Securities. Before joining ETF Securities, Jheon was a leader in portfolio management, product development and finance at Barclays Global Investors (BGI).

He was part of the inception team for iShares in 2000 and served on steering committees developing over 100 funds. Jheon holds an MBA from the University of Toronto and a BA from the University of Alberta and is a licensed CPA.

Research: ETF Securities is relatively new in the U.S. ETF marketplace, but not new to the ETF business. Please explain.

Jheon: ETF Securities recently entered into the U.S. ETF marketplace with our first listed product, ETFS Physical Silver shares (SIVR), on the NYSE in July 2009. About two months later, we listed ETFS Physical Swiss Gold shares (SGOL) As part of the global business strategy, we have had our eyes on the U.S. market for a while. We thought that the demand for commodity ETFs, especially precious metals, was strong and therefore the time was right to launch here.

ETF Securities has a compelling history of being innovators and pioneers in commodity ETFs. The management of ETF Securities created the world's first gold ETF (GOLD) back in 2003 in Australia.

The first gold ETF was remarkable in the fact that it was not only the world's first gold ETF, but actually the first time anyone had listed a commodity on a stock exchange. The company then went on the launch the first oil ETF in 2005 in Europe and a full platform of commodity products thereafter totaling over 130 different commodity exposures.

ETF Securities is now a global business with commodity ETFs listed in Europe, U.S., Australia and Japan. Our goal here in the U.S. is to become the leading provider of commodity ETFs.

How does the U.S. ETF market compare to Europe and the rest of the world?

The U.S. ETF marketplace is the largest market globally. Currently the estimated size of ETF holdings is about $650 billion, but studies indicate the growth trajectory will continue towards $2 trillion by the end of 2011. Comparatively, the European market is approximately a third of the U.S. in terms of assets under management.

However, the number of products offered in Europe is on par if not more than the number of products offered in the U.S. In terms of commodity ETFs, the range of products available in Europe is ahead of where the U.S. ETF market is right now. We are working very hard to change that and to offer U.S. investors a similar set of products to those available to European investors.

Your firm recently launched SGOL. How is it different from other gold ETFs like GLD and IAU?

Yes, we recently launched a physically backed Swiss gold ETF. Let me start with the similarities. The structure is a 1933-act grantor trust and is physically backed with gold bullion. Each share represents the USD equivalent to approximately one tenth of an ounce of gold. However, the differences are compelling and SGOL is really a reflection of creating a product to satisfy investor demand. SGOL is differentiated from others by storing the physical gold in Switzerland, rather than the U.S. or U.K. like other products.

This is a way for investors to diversify their gold holdings not only by geography but also by custodian, issuer and vault as well. Switzerland is recognized internationally as a neutral country, an international banking center and gold storage location and has had no gold confiscation history like the US. Investors can access unique gold bar numbers by going onto our website.

The gold bars held in the SGOL custodian vault are independently inspected twice a year by a third party. SGOL is also the lowest priced physically backed ETF in the U.S. with an expense ratio of 0.39 percent.

Your first U.S. launch was SIVR. How's silver performing? Please explain the fund's general strategy.

We are pleased with the performance of SIVR. SIVR aims to track the spot price of silver, less the trust's expenses. Silver has outperformed gold on a relative basis this year so interest is strong. Over the past two months since inception, we have garnered over $140 million in assets. Trading volume is also positive consistently trading over 100,000 shares a day with tight bid/ask spreads.

How are financial advisors using products like SGOL and SIVR in their clients' portfolio management?

At a broad level, the feedback we have heard from FAs [is] they are using SGOL and SIVR as an asset allocation tool for client portfolios to achieve portfolio diversification, reduce risk/volatility. This is in line with the tenets of Modern Portfolio Theory. Also, given the current environment, FAs are using SGOL and SIVR to hedge against the falling U.S. dollar and hedge against inflation.

Recently, the U.S. Commodities Futures Trading Commission (CFTC) began limiting the size of positions that commodity ETFs can take. How is this impacting your metal ETFs?

Because SGOL and SIVR hold physically backed precious metals and do not hold derivatives such as futures, they have not been subject to the position limits experienced by other commodity ETFs and ETNs.

The CFTC alleges that commodity index funds are distorting commodity prices, but most of these funds never take physical delivery of the commodities they own. How can you distort a market without depleting its supply?

This is an area that certainly has two sides to the argument. Part of the view on distortion was due to the rolls and roll schedules of futures coupled with whether the underlying commodities are in contango or backwardation. Some products were rolling their positions all in one day and as a result created upward pressure at certain times on commodity future prices.

In the future, what other ETF products might we see from your firm? For example, will they be similar to products in your European lineup?

Yes, we plan to continue developing our physically backed products and then opportunistically look at other commodity ETFs similar to our European product lineup.

What other significant trends do you see in the ETF marketplace?

Broadly, I see ETFs as investment tools gaining more popularity and traction over mutual funds. Currently, ETFs represent a little over 6 percent of the $10 trillion dollar mutual fund market. If you asked me a few years ago, that percentage would be much smaller.

Going forward, I think the rate of adoption into ETFs and penetration into the mutual fund space will be sizable. Also, I expect to see more product offerings in asset classes such as fixed income, currencies and most certainly commodities. So far, equity has been well represented with ETFs so I expect less product development breadth there.
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