Launch of battery metals exchange-traded commodity shows shift in investor focus

The recent launch of the Global Palladium Fund’s (GPF) electric vehicle (EV) metals exchange-traded commodity (ETC) product highlights how investor demand is veering toward achieving higher exposure to the physical commodities that are driving the energy transition.

This ETC, the launch of which was announced by GPF on Tuesday February 1, is intended to offer investors exposure to metals and serve as a hedging opportunity for investors against metal equities outside of broad-based indices for futures.

With $10 million in initial seed capital, the product has a basket that includes copper (40.00%), palladium (28.13%), nickel (18.65%), cobalt (11.45%) and platinum (1.77%). It will track the performance of the Solactive GPF Electric Vehicle Index. The index will be rebalanced annually as the metals’ uses evolve.

Lithium was a notable absentee in the underlying commodities picked by the fund.

This “identifies one of the issues with lithium carbonate and hydroxide – they do not store that well, unlike a lump of metal,” Fastmarkets’ head of battery metals research William Adams said.

The physical metals underlying the ETC will be stored in London Metal Exchange warehouses in Rotterdam, and in London Platinum & Palladium Market (LPPM) vaults in London and Switzerland.

Commenting on the launch, GPF chief executive officer Alexander Stoyanov singled out the “phenomenal” growth in consumer appetites for EVs, which is drawing investors to the space.

Battery raw material prices have surged over the past year.

Driven by rising demand and supply tightness, cobalt metal costs in recent weeks have traded at their highest level since August 2018. Fastmarkets assessed the price of cobalt, standard grade, in-whs Rotterdam at $34.50-35.00 per lb on February 11, up by 2.87% from $33.50-34.05 per lb on January 3.

The growth prospects of the energy transition trend in the transport sector are creating new investor interest that is reaching beyond equities and toward commodities.

“This ETF is an interesting opportunity for investors who seek exposure to the [energy] transition because it is the purest play. You are not [investing] in one or a few companies but in the essential metals needed to make this transition happen,” Fastmarkets research analyst Boris Mikanikrezai said.

That is where this ETC product, which offers direct exposure to physical commodities, fits: investors looking to double down on their energy transition portfolios but at the same sidestepping the equities markets – at a time of expected volatility for stocks in 2022.

High inflationary rates, in North America and Europe, are expected to have a correction effect on stock markets. Looking at the S&P 500 Index, Lisa Shalett, chief investment officer of wealth management at Morgan Stanley, wrote in December that the bank expected a “rangebound and volatile” trend.

The first quarter of 2022 is looking challenging for equities so far. The S&P 500 has fallen by more than 6% thus far this year after rising by 15% in the past year.

Bank of America analysts this past week warned of more “turbulence” that will rock stock markets in the near term following fast rate increases by the United States Federal Reserve to control inflation.

This could entice investors to diversify away from equities and toward commodities. From this perspective, the launch of the battery metals ETC could also be viewed as a product of the popularity of passive investment vehicles combined with the energy transition trend that economies are pursuing.

“Equity valuations have been pretty rich due to the Fed’s easing cycle during the Covid-19 era. As the Fed looks to tighten its policy, financial assets, even if they are exposed to commodities, tend to underperform commodities in this environment,” Mikanikrezai said.

As inflation and rising interest rates remain a fundamental feature of western economies this year, and with EV demand growing unabated, investors’ interest in battery metals commodities could be a growing trend in the near and mid-term.

“We could see more inflows into commodity funds in the next 18 months and [the GPF] ETF could benefit from a possible surge in investment flows into commodities as investors rebalance their portfolios,” Mikanikrezai said.

Cristina Belda in London contributed to this article.