I recently wrote about the controversy surrounding the rise of physically-backed metal exchange-traded funds (ETF), which have seen their popularity grow as investors take shelter from a declining dollar and attempt to profit from the run in precious metals (see Tempest in a Metals Vault). Last Friday London-based ETF Securities launched ETFS Physical Precious Metals Basket Shares (NYSE: GLTR). Each share is backed by 0.03 ounces of gold, 1.1 ounces of silver, 0.004 ounces of platinum and 0.006 ounces of palladium stored in vaults in London or Zurich. ETF Securities already offers a roster of physical metals funds–ETFS Silver Trust (NYSE: SIVR), ETFS Physical Palladium Shares (NYSE: PALL), ETFS Gold Trust (NYSE: SGOL) and ETFS Physical Platinum Shares (NYSE: PPLT). The new fund is an excellent composite of ETF Securities’ lineup of physical metal funds.

The investment case for gold and silver is straight forward. But the argument for investing in palladium and platinum may be less obvious.

Palladium is an industrial metal with a variety of uses ranging from water treatment, oil refining and dental work. But it’s probably best known for its use in catalytic converters.

Over the past year the price of the palladium has risen from a low of $214 to its current price of about $477. It’s more than $100 off a five-year high established in early 2008, and there’s every reason to expect the price will increase as the global economic recovery gains steam. Palladium prices also reflect the health of automobile manufacturers because more than half of the metal’s annual production is used in catalytic converters.

Platinum is also used in a variety of industrial applications and is even rarer than gold–last year about 6 million ounces of platinum were mined compared to almost 65 million ounces of the yellow metal. Platinum is another key component in catalytic converters as well as electronics such as LCD televisions and computers. The metal tends to lag gold when fear is running high, but prices often recover quickly when the economy is on the mend.

Platinum and palladium can’t match gold as a hedge against tough economic times, but they are an excellent play on a continued global recovery.

ETFS Physical Precious Metals Basket Shares has been billed as one-stop shopping for investors seeking exposure to precious metals. I like the idea, but I have doubts about the fund’s value proposition. At current market prices, gold and silver will largely drive the fund’s performance. The fund is also pricy with an expense ratio of 0.60 percent. That’s substantially higher than SPDR Gold Share’s 0.40 percent expense ratio or iShares Gold Trusts’ (NYSE: IAU) expense ratio of 0.25 percent. Based on the fund’s metal weightings, you could essentially build the same exposures with a collection of ETFs that sport lower annual expenses, though the additional transaction fees could negate the cost benefit.

Additionally, the benefit of packaging all four metals together remains unclear. While the trailing 12-month correlation between gold and palladium runs just over 0.5, correlations between the pairs of platinum and palladium and gold and silver run in excess of 0.8. The value of holding all four is questionable unless you’re simply making a bet on the outperformance of metals as a group.

Nonetheless, the fund represents another step forward for physical commodities-backed funds.

In another sign of the growing interest in physical metals funds, both JP Morgan and iShares have filed papers with the Securities and Exchange Commission announcing their plans to launch physically-backed copper funds, though the launch dates haven’t been disclosed.