By Olly Ludwig
Sprott Asset Management, the Toronto-based firm run by precious metals investor Eric Sprott, 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 (SPPP - News) with other ETF launches. The crucial difference from IndexUniverse’s perspective is that ETFs are designed around the creation/redemption mechanism, which keeps a given security’s price converging on its net asset value ((:NAV)).
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.
SPPP comes with an annual management fee of 0.50%, 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 redemptions:
“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% 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 (:PHYS), which also engendered confusion among financial journalists, some of whom called the gold fund an ETF at the time of its rollout.