Why Commodity Equity ETFs Are Making a Comeback

November 2nd at 1:00pm by Tom Lydon

110_F_29463_FDNgqewFgUvEXTPMA6GhVwFBzQEfTu As the commodity markets get a little more tricky to navigate in the face of regulations, equity-based commodity exchange traded funds (ETFs) could be one of the solutions.

As the Commodity Futures Trading Commission (CFTC) mulls over position limits for futures-based commodity ETFs, many providers are launching commodity equity funds to help sidestep the issue altogether. (The four types of commodity ETFs).

Cinthia Murphy for Index Universe lays out the facts:

  • It’s not a one-to-one relationship. The long-term correlation between equities and futures is good, but not perfect.
  • Investing in commodities-linked equities can be more volatile than tracking spot prices of commodities, warns Ed Lopez, product manager for Van Eck. “Any small movement in spot prices can actually affect producers greatly,” he says.
  • Futures-based commodity index products may, over time, demonstrate significant tracking error against spot indexes because of the influence of contango, which is when the futures prices is above the expected future spot price.
  • Equities are performing better than futures this year. Many investors may be a little skittish of futures while the CFTC officially decides what the limits will be. (How to avoid bubbles).

For more stories about commodities, visit our commodity category.

Some equities-based commodity ETFs:

  • ALPS ETF Trusts Jefferies TR/J CRB Global Equity Index Fund (NYSEArca: CRBA)
  • Market Vectors Agribusiness (NYSEArca: MOO)
  • Market Vectors RVE Hard Assets Producers (NYSEArca: HAP)
  • SPDR S&P Metals & Mining (NYSEArca: XME)

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.