Commodities exchange traded funds’ assets under management have surged to almost overtake those in commodities indices, the traditional vehicle for gaining exposure to the asset class.
If sustained, the move, which has been driven by strong inflows into gold and other precious metals-backed ETFs, could signal a shift in the way investors access commodities.
Part of the drop in indices’ assets under management is due to lower oil prices, as they are heavily weighted towards energy, but also reflects investors’ redemptions.
Barclays Capital estimates commodities ETF’s assets at about $51.9bn at the end of January, just below the $56.4bn held in commodities indices such as S&P GSCI or the DJ-AIG, popular among pension funds and other institutional investors.
Kevin Norrish, of Barclays Capital in London, said that commodities ETFs were “likely to soon become the dominant product for commodity investments”.
Hector McNeil of ETF Securities, a London-based company that pioneered the development of the products, said commodities ETF assets under management globally were likely to “double over the next 12 months” to more than $100bn.
“I think two-thirds of the increase will come from rising inflows and another third from an increase in precious metals prices,” he said.
Commodities exchange traded funds are listed securities backed by a commodity – either physical commodities, such as gold bars, or commodity futures, such as crude oil futures contracts traded on the New York Mercantile Exchange.
The industry says the ETF allows ordinary investors to access the commodities asset class through regular brokerage accounts, opening a new asset class to managers that in the past did not want to deal with the difficulties of investing in futures or physical commodities or, because of regulations, were barred from the asset class.
“The flexibility of the ETF is attracting investors,” said Mr Norrish, pointing out that a plethora of new ETF products allow investors to gain exposure to individual commodities – while indices usually target a basket of commodities – along with the ability to bet on falling prices, or short them. Commodities indices are usually a long-only, passive investment, betting on rising prices.
Barclays said the greater flexibility is “valued” by investors and these products have recorded over $11bn of fresh inflows since July 2008.
Commodity indices, on the other hand, have seen outflows of about $13bn over the same period, hit by both risk reduction and the weakness of long-only strategies in a bear market.
Commodities ETFs are relatively young compared with other exchange traded products. The first developed, the Gold ETC, was launched in 2003, 10 years after the first equity ETF was created. Gold still represents about 75 per cent of the total investment in ETF, according to industry estimates.
Inflows into gold-backed exchange traded funds surged in January as investors sought the precious metal as a safe haven, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes.