Sprott Asset Management, the Toronto-based firm run by precious
metals investor Eric Sprott, today is launching a physical platinum
and palladium fund, though it's crucial to remember that it's a
closed-end fund and not a bona fide exchange-traded fund.
There's some confusion about that, as some reports are bunching
the Sprott Physical Platinum and Palladium Trust (NYSEArca:SPPP)
with other ETF launches. The crucial difference from
IndexUniverse's perspective is that
are designed around the creation/redemption mechanism, which keeps
a given security's price converging on its net asset value (
But SPPP's prospectus clearly states that it's a closed-end
fund, which means the fund can trade at premiums or discounts to
its NAV for extended periods of time because the number of
outstanding shares is static relative to an ETF. In other words, a
closed-end fund can create new shares, but it's not a process that
occurs in real time as it does with ETFs.
Still, SPPP does provide investors with similar exposure as bona
fide ETFs, notably the ETFS Physical Platinum ETF (NYSEArca:PPLT)
and the ETFS Physical Palladium ETF (NYSEArca:PALL).
SPPP comes with an annual management fee of 0.50 percent, which
amounts to $50 for each $10,000 invested. By comparison, both PPLT
and PALL both have annual expense ratios of 0.60 percent.
SPPP, like other Sprott closed-end metals funds, has a
redemption feature that allows shareholders to redeem their shares
for actual physical platinum and palladium. Following is a verbatim
description from the prospectus of the costs to investors of such
"Assuming the price of platinum to be $1,400 per ounce and the
price of palladium to be $640 per ounce, and using current expense
estimates, a Unitholder redeeming a block of 25,000 Units for
physical platinum and palladium bullion will be responsible for
approximately $1,045 in expenses incurred by the Trust in
connection with such redemption, representing 0.42% of the value of
the bullion represented by the 25,000 Units so redeemed."
The other detail about closed-end funds worth repeating is that
underwriters of the offering are entitled to a 5 percent fee at the
time of the initial public offering.
Of course, that doesn't apply in the secondary market, but
investors in ETFs never have to pay such underwriting fees.
IndexUniverse Director of Research Dave Nadig took up the topic
of Sprott precious metals funds in a blog almost three years ago.
He didn't mince words as he parsed the differences between real
ETFs and the Sprott Physical Gold Trust (NYSEArca:PHYS), which also
engendered confusion among financial journalists, some of whom
called the gold fund an ETF at the time of its rollout.
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