Precious metal ETFs: Everything that glitters

John Fletcher, head of ETPs at Charles Stanley, looks at the flurry of precious metal ETCs recently launched and how they differ

Recently, we saw iShares announce its first foray into the commodities markets with the issuance of ETCs on the London Stock Exchange. As with most exchange-traded products, this investment space has already been well covered by other UK-centric providers, most notably ETF Securities, Source and Deutsche Bank, all of whom have similar physically backed precious metals ETCs.

Despite this, the decision from iShares to move into the commodity arena is positive as it plugs a previously large void in this sector for the issuer. With the global market ETP leader now in the commodity space, competition among providers will increase.

iShares appears to have priced the total expense ratios (TER) purposely lower than its main competitors. This will hopefully have the effect of reducing management costs for the investor further, as other ETP providers move their prices to compete. Indeed, as I write, Source has just released three new physical precious metals ETCs to complement its Gold ETC, each priced at 0.39% TER per annum, already undercutting the new ETCs from iShares.

It is likely to be some time before iShares attracts enough assets under management (AUM) to directly compete with the existing main issuers and it is for this reason one could expect slightly wider spreads and maybe struggle to fulfil very large trades with the iShares ETCs in the medium term. However, with iShares’ marketing muscle, this state of affairs should hopefully only be transitory.

Why go for iShares ETCs?
A subject often featuring in the news recently is the continuing complexity and evolution of ETPs. In April the Financial Stability Board (FSB) released a paper on the risks of ETFs, which essentially called into question whether investors were really aware of the full transparency of the products they were buying.

It highlighted certain inconsistencies with regard to the subject of transparency and stock lending, as well as swaps and derivatives trades that often occur in the background, and how these could potentially unravel disastrously in a sudden and sharp market fall.

In this regard, it would be surprising to see anything disastrous happen to the physical ETCs mentioned, as the debt securities are fully backed by bullion lodged securely in a bank vault.