By Terry Wooten of Kitco News
New York -- (Kitco News) --China’s investors will embrace exchange traded funds in greater numbers and the ETF markets there will match the U.S. and other countries in embracing the instrument in a few years time, according to William Rhind, strategic director of ETF Securities.

In an interview with Kitco News, Rhind was asked about ETFs in China and emerging markets and about a recent report showing a growing popularity of the instruments in India.

Rhind said ETFs for Gold and other precious metals have taken off in India because the market is favorable to gold, which is a popular product in the country for jewelry and for investment.

“In China ETFs will become very big, just as they have in the U.S.,” Rhind told Kitco News. “They are still a few years behind in terms of the evolution in that marketplace compared to the U.S., Europe, Australia and Japan. But China will definitely get there.”

Rhind said the lag in ETF interest stems from the Chinese investing public’s affinity for mutual funds and other instruments. “For the investing public in China, the availability of these vehicles (ETFs) is really small compared to America and Europe where it is ingrained in our culture.”

He said the ETF market in China will develop as the investor base develops. “Right now single stocks are still very popular and buying gold futures is still very popular,” he said. “We see less popularity for fund-based products than we do, say here in the U.S. They will get there, though.”

ETF Securities was a pioneer of gold ETFs and has developed other precious metals ETFs, notably silver, Platinum and palladium.

Rhind said the next new invention in the ETF world will be physical base metals ETFs. The popularity will be linked to the popularity of the underlying metal, he said. Copper is a natural for an ETF because it is a Lead indicator for economic growth. Rhind said the Chinese are major buyers and the production of the red metal is concentrated in relatively few hands.

“It is a sector that people want to get exposed to, especially if they are bullish on economic recovery,” he said.

One of the challenges for base metals ETFs compared to precious metals is that more storage space is needed. “Because of the high value price of precious metals, the space needed to store gold, platinum or Palladium is relatively small,” he said. Holding metals such as copper or aluminum require much more space because the price per pound is so much cheaper.

“You will need massive warehouse facilities to store that $200 million trade in copper and that is very different from one in gold,” he said. “There are large engineering challenges involved in base metals to provide that structure. No one has been able to do it yet.”

He said what is seen in the market now is for closed-ended funds where someone buys a lot of metal that has been securitized by selling shares against it. “No one has managed to perfect the art of offering a fund that has the continuous ability to issue shares and to grow according to supply and demand in the market. But it is something we’re working on.”

Rhind said ETFs are popular, partially because of their simplicity. “It is a simple concept of having a fund which trades on a regular stock exchange, just like any other share. “Instead of buying a share of IBM, you can now buy a share that gives you a share of an index on emerging markets or a Gold price,” he said. “And that is very appealing to investors.”

ETFs in gold in particular have been hot the last few years as the price hit records above $1,260 an ounce. Rhind sees more growth for ETFs, no matter where the price of gold lands. Rhind emphasized that the ETF industry has grown to more than a trillion dollars since the first was launched in 1993 and there is a diversity of products outside of precious metals.

“Regardless of where gold goes, where the price goes, there are plenty more ETFs out there, even in the precious metals sector alone,” he said. “You’ve got ETFs in silver, Platinum and palladium. You’ve got good diversification, even in the precious metals sector if you decide gold is not as favorable as some of the other metals.”

ETFs have come under some criticism as favoring short-term speculation and of damaging the traditional hedger-speculator relationship, but Rhind disagreed.

“Most of the stuff you have read about is totally unfounded on the subject and is peddled by people with special interests,” he said. “One of the great features of ETFs is that you can use them for short-term trading. But nobody is forcing you to do that. Many of our clients will hold them for many years. So we’re talking about an element of flexibility. What ETFs do is to put the investor in control. The investor can decide whether they want to be a short-term investor or a long-term investor.”

Rhind was asked what effect the new financial reform law will have on the ETF market. He said it would be difficult to tell immediately because of the intricacies of the act.

“I think the ETF industry is lucky because it has held itself out for a long time as a promoter of transparency and of higher regulation and of fair products to customers,” he said. “From that regard, we’re probably better positioned than most. In the advent of more transparency and regulation, that is a good thing and will benefit ETFs.”

By Terry Wooten, of Kitco News; twooten@kitco.com

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