There are several reasons for the surging popularity of these funds. For starters, the majority of physical metal funds are extremely cheap–SPDR Gold Trust charges an annual expense ratio of just 0.40 percent–which often makes ownership of the funds cheaper than the storage of physical bullion.

Secure storage of bullion is also extremely challenging, requiring safes or deposit boxes. Acquiring and liquidating positions in physical bullion can be costly and time consuming.

Finally, the value of metal shares, which use futures or other derivatives to build exposures, can vary wildly from spot prices, making them questionable hedging instruments for individual investors.

The announcement of a new physical metal fund is generally greeted with fanfare. That wasn’t the case on Monday though, when ETF Securities announced at a metals show in London that it was preparing to launch a new line of ETFs that would focus on industrial metals such as copper, aluminum, tin, zinc, nickel and lead.

A major criticism of physical commodities funds is that their activities can skew market prices; storing commodities limits available supply, driving prices up. In fact, many observers lay some of the blame for the huge run up in gold prices at the feet of SPDR Gold Trust.

While the new metals funds are likely to trade only in London initially, analysts predict that the copper fund alone could drive copper prices skyward by as much as 20 percent–an unwelcome outcome from their perspective.

Lost in the debate about the benefits of physical metal funds is the underlying assumption that funds create new demand and thus drive prices higher. That’s like putting the cart before horse.

While ETF issuers tend to throw ideas at the wall to see what sticks, they live and die by gauging investor demand. Investors have been clamoring for more efficient vehicles to help them tap into physical commodities for the dual purposes of long-term inflation hedging and short-term trading. If you want to blame someone for the physical metals phenomenon, you really should blame investors.

It’s easy to understand why manufacturers and others who rely on raw materials are unhappy with the current situation. Rising prices mean higher costs and potentially lower profits.

But these funds have allowed investors to more efficiently participate in the markets without having to store the physical commodities themselves or enter into the futures markets. The funds can also boost profits for commodity producers while encouraging end-users to consume less.

Still, I wouldn’t be surprised if these proposed funds end up as a flash in the pan.

Physical commodity funds based on precious metals such as gold, silver, platinum or even palladium make sense. These metals trade in ounces and are relatively easy to store economically on a large scale.

But base metal funds will need to store tons of metals, requiring numerous secure warehouses rather than vaults. While these funds sound good in theory, it’s unclear whether they can be operated with any reasonable economy, particularly in their early stages.

What’s New

Three new funds were launched last week, bringing the total number of new exchange-traded products issued this year up to 176.

Credit Suisse Merger Arbitrage Liquid Index ETN (NYSE: CSMA) tracks a Credit Suisse merger arbitrage index comprised of parties in pending mergers and acquisitions (M&A) deals. Using the traditional M&A arbitrage strategy, the index is designed to go long on target companies and short the acquirer, rebalancing every time a new deal is announced.

IndexIQ IQ Merger Arbitrage ETF (NYSE: MNA) is the only other M&A-focused exchange-traded product on the market. However there are a few key differences between the two products. The most obvious lies in their basic structure; the IndexIQ fund is a true exchange-traded fund while the Credit Suisse offering is an exchange-traded note. IndexIQ IQ Merger Arbitrage ETF also maintains short exposure to global equities as a market hedge.

Averaging 63,000 shares traded daily, Credit Suisse Merger Arbitrage Liquid Index ETN has already built up its daily trading volume. IndexIQ IQ Merger Arbitrage ETF typically averages about 7,000 shares per day. The IndexIQ fund also carries an expense ratio of 0.55 percent compared to the 0.75 percent charged annually on IndexIQ IQ Merger Arbitrage ETF.

There’s a chance that Credit Suisse Merger Arbitrage Liquid Index ETN may see its volume taper off in the coming weeks. But unless short exposure plays a role in your investment strategy, the ETN is the better vehicle for gaining exposure to M&A activity.

JPMorgan Chase (NYSE: JPM) launched two double inverse Treasury ETNs; JPMorgan Double Short US Long Bond Treasury Futures ETN (NYSE: DSTJ) and JPMorgan Double Short US 10 Year Treasury Futures ETN (NYSE: DSXJ). Both funds, which are essentially bets on rising interest rates, should provide double the inverse performance of continuous rolling exposure to Treasury futures contracts. Both will charge annual expenses of 0.85 percent.

At this point, both ETNs are fairly illiquid and play in a crowded field. I would steer clear of both for now.