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The Palladium ETF Is The Ultimate Volkswagen Victor

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The Palladium ETF Is The Ultimate Volkswagen Victor

The American depositary receipts (ADRs) of German automotive giant Volkswagen AG (ADR) (OTC: VLKAY) are down more than 3 percent at this writing Friday and have touched a new 52-week low.

Volkswagen ADRs have plunged 36.5 percent over the past month following an emissions scandal and reports of fraudulent software in a sizable percentage of Volkswagen models on the road in the United States.

As reported earlier this week, Teo Lasarte, Bank of America Merrill Lynch analyst, “sees four potential risks to the company as the Volkswagen emissions scandal continues to play out.”

Related Link: Volkswagen Risks May Be Overlooked Despite Press Disaster, Analyst Warns

The report continued, “Risks include regulatory fines, lawsuits, recall costs and a potential capital increase to the company’s financial segment. At this time, developments are too early-stage for Bank of America to attempt to quantify these risks accurately, but Lasarte estimated that the company could face €26.5 billion in liabilities.”

Lasarte is just one analyst. Others have heaped bearish calls on Volkswagen as well, and with the risks outlined by Lasarte nowhere close to being resolved, it is reasonable to expect the sell side will not be warming to Volkswagen anytime soon.

Volkswagen And ETFs

Volkswagen's negative impact on exchange-traded funds has not been too dramatic, but there has been fallout. For example, the iShares MSCI Germany Index Fund (ETF) (NYSE: EWG) is off more than 5 percent over the past month, as its weight to Volkswagen has dwindled to just 1.7 percent.

The First Trust NASDAQ Global Auto Index Fund (First Trust Exchange-Traded Fund II (NASDAQ: CARZ)), the only dedicated automotive ETF, is lower by 2.2 percent over the past month. CARZ has a Volkswagen weight of less than 2.4 percent, according to First Trust data.

Just as EWG, CARZ and other ETFs have struggled in the wake of the Volkswagen scandal, the ETFS Physical Palladium Shares

(NYSE: PALL) has flourished. Perhaps precious metals are trading higher Friday because of the slack September jobs report. However, PALL is up 3.4 percent at this writing on volume that has already eclipsed the daily average because Volkswagen ADRs are lower. Friday's jump brings PALL's one-month gain to 21.6 percent.

Over the same period, the SPDR Gold Trust (ETF) (NYSE: GLD), the largest commodities ETF, is up just 0.8 percent. PALL is the palladium equivalent of GLD, as the former holds physical palladium.

Related Link: A Different Way To Bet Against Volkswagen

Volkswagen And Palladium

Volkswagen's woes have been a boon for PALL for a simple reason: Diesel automobiles require platinum for the production of catalytic converters, and it is diesel that has gotten Volkswagen in trouble. Volkswagen explains why PALL's platinum-based cousin ETFS Physical Platinum Shares (NYSE: PPLT) is off nearly 10 percent over the past month.

Platinum now resides at its lowest levels in 13 years against palladium, according to Platts. For its part, palladium is the key ingredient in the production of catalytic converters for gasoline-based automobiles.

History has shown there are two fundamental catalysts that have the power to move PALL:

  • 1. Supply concerns, either by way of traders fretting about dwindling supply in Russia or labor strikes in South Africa. Russia and South Africa are the two largest palladium-producing nations.
  • 2. Automotive demand. Most of the automobiles produced in the United States and China, the world's largest automotive markets, are gas-powered, meaning manufacturers require palladium, not platinum, for the production of catalytic converters.
  • Put simply, the longer Volkswagen's problems persist, the more upside potential PALL might have.

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