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Portfolio > Portfolio Construction

The Benefits of Adding Industrial Metals: Portfolio Fix

By Ed McCarthy, CFP, RICP

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Gold captures most of the attention as the safe-haven investment during periods of political or financial instability.

With the metal trading over $1,400 in early March, though, it’s worth asking if we may be seeing a price bubble or at least a significant reduction in the metal’s risk-return profile going forward.

For clients who want some metals exposure but aren’t comfortable with gold at these levels, ETFs that invest in industrial metals such as palladium and platinum merit a look.

These metals benefit from both economic recovery and the resulting improved demand, but they also have a degree of the safe-haven/investment appeal.

“They are used in various industrial applications, so there’s a real world supply and demand for them,” said Michael Johnston, a senior analyst with ETF Database (etfdb.com), in an interview.

“I think that connection between the industrial sector and, then, in particular, the demand for emerging markets has helped all of [them] perform pretty well lately,” he explained

Johnston cites ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL), both from ETF Securities, as two ETFs worth consideration. These funds invest in the physical metal, similar to SPDR Gold Shares (GLD).

Best in Class FundsWhat’s the benefit to this approach? “You avoid some of those potential headaches that you get into when you’re dealing with contango, i.e., an upward- sloping forward curve) and a futures-based strategy,” shared Johnston.

Both PALL and PPLT have performed well, generating one-year returns of 84% and 16%, respectively, through February 28.

Johnston doesn’t provide investment advice, but he sees a benefit to having a 5%-10% commodities allocation in many client portfolios, although he urges advisors and investors to be cautious.

“I think these are pretty powerful tools, and there are a lot of potential benefits of tapping into this asset class, particularly given the strength of emerging markets and the potential ability to add some diversification benefits and smooth out the risk of a portfolio,” he said.

“But, at the same time, it certainly requires being careful,” Johnston explained. “You can get burned if you don’t use it correctly.”

(For a complete list of commodity, and other, ETFs, see Research magazine's quarterly ETF reference guide.)

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