Commodity
exchange traded funds (ETFs) and exchange traded notes (ETNs) have come
a long way since Nov. 18, 2004. That’s when the first single-commodity
ETF – streetTRACKS Gold Shares (GLD) – was launched.
Of the 30 or so physical commodities traded in the United States, 12
of them trade with a huge amount of volume. There are three ways to
access commodities through an ETF or ETN:
1) A broad, diversified basket replicating an index such as the GSCI
2) A basket of futures that track commodities from the same area, such as agriculture
3) Single commodity ETFs and ETNs
When you think single commodities, obvious ones like gold, wheat and
oil come to mind. That was the thinking at Victoria Bay Asset
Management when the United States Oil (USO) was launched in April 2006.
Victoria Bay Asset Management Chief Investment Officer John
Hyland says you wouldn’t want to bring out a fund on a commodity that
hardly trades at all. "The way sponsors approached it was they either
went for the basket, or went for the major commodities first."
U.S. Oil was followed by United States Natural Gas (UNG) in April 2007, United States Gasoline (UGA) this February and United States Heating Oil (UHN) last month.
"It’s nice to say that it’s 100% that we had a brilliant strategy to be able to say we did things why we did. In reality, there are some simpler factors involved," Hyland says. In other words, the fuels on which the world runs
seemed like a natural product around which to build an ETF.
"We did see there was an opportunity in these areas. There was an opportunity to be the first with these kinds of products."
Hyland stresses that he’s not telling anyone it’s a good or bad idea
to be investing in these commodities. "We think they deserve
representation in the investor’s menu of choices, but that doesn’t mean
investors should or should not be using them."
Look at your own outlook, the risk you’re willing to take and the returns you believe you’d make by owning such a product, and remember to read the prospectus.
Hyland is officially neutral on where he thinks oil will go. "Nobody really knows. It’s not our job to know."
In fact, not all investors in an ETF will be on the same page when
they hope something will go up or down. When it comes to ETFs, there
are two types: those who are long, and those who are short.
For that reason, says Hyland, "If I say oil’s going to go up, half
the users will be unhappy. If I say it’s going down, the other half
would be unhappy. You can’t win."