July 8, 2014 6:21 pm

Good returns bring investors back to commodity ETFs

The best commodities performance in years has rekindled interest in exchange traded funds that allow investors to trade the price of energy, metals and grains on stock markets.

At one time, some ETFs were so large that critics contended they distorted wholesale markets for food and energy. Assets held in many of the biggest funds have shrunk from their peaks.

But new figures show investors began to creep back into commodity ETF products as the benchmark Bloomberg Commodity Index rose 7.1 per cent in the first half of the year. The direction of flows varied by geography and sector, however.

Citigroup analyst Aakash Doshi estimates net inflows of $5.3bn into commodity ETFs so far this year, led by precious metals and products tracking broad baskets of commodities. The figures are drawn from markets including the US, Europe, South Africa, India and China.

Precious metals funds remain by far the largest commodity ETFs, topped by the $33.9bn SPDR Gold Trust. As funds sold gold bars to meet redemptions over the past two years, gold prices plunged from $1,900 per troy ounce to $1,315. The SPDR peaked at $77bn in August 2011.

ETF Securities, a provider of exchange traded funds, said outflows continued from gold ETFs this year but funds tracking platinum and palladium, used in automotive catalytic converters, received heavy inflows. A palladium ETF launched in South Africa has proved particularly popular with investors.

Flows have also differed by regions. ETF.com, a data tracker, said US commodity ETFs suffered an aggregate $814m in outflows in the first half of the year. This was modest compared with $30bn in outflows from US funds in 2013.

Early commodity ETF investors were burnt when futures markets such as crude oil began sloping upwards, costing them money as the ETF replaced expiring futures contracts with more expensive contracts with a later delivery date. The oil futures curve has since begun sloping downwards.

“Commodities were the hottest of hot things while oil was trading at huge levels and gold was going through the roof,” said Matt Hougan, ETF.com president. “That’s not the case any more.”

The United States Oil Fund, the largest oil ETF, in 2009 held $4.3bn. It now holds about $640m after receiving $43m in inflows this year, according to ETF.com.

The broad-based PowerShares DB Commodity Index Tracking Fund, worth $7.1bn at its peak last year, now contains about $5.7bn in assets after $240m in outflows this year.

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