Why Commodity ETF Assets Are Soaring

February 20th at 11:00am by Tom Lydon

The traditional way to gain exposure to commodities for investors has been surpassed by the exchange traded fund (ETF), which has given those interested a cost-effective and manageable tool to get the needed access.

Commodity ETF assets under management have nearly exceeded those in commodities indexes, once the only way to get exposure to this segment of the market. Javier Blas for the Financial Times in London reports that 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.

Barclays estimates the assets in commodities ETFs to be about $51.9 billion, compared with the $56.4 billion held in indexes such as the S&P GSCI.

Commodity ETFs have seen their share of outflows, though. This is primarily because of plummeting oil prices.

A commodity ETF is a 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 best thing about commodity ETFs is that investors can now access this part of the market through regular brokerage accounts, and either target a specific commodity or the chance to short or hedge with them, without actual physical holding. Barclays assumes over $11 billion in new inflows since July 2008 are in commodity ETFs.

Many investors and managers were wary of dealing with commodities before the advent of ETFs because of the challenges involved in futures investing or dealing with physical commodities. ETFs also give them the ability to bet on falling prices, whereas indexes are long-only investments.

  • iShares S&P GSCI Commodity-Indexed Trust (GSG): down 21.04% year-to-date; down 30% over three months.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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