The finger-pointing about who’s to blame for the rising commodities prices is in full force, and exchange traded funds (ETFs) are not immune from being fingered as a possible cause.
Market Club for iStockAnalyst ponders the current situation and what, if any, role ETFs have in it. In his opinion, commodity ETFs have contributed in two ways:
- By allowing casual investors to participate.
- By creating a new type of participant in the futures market: the tracker. There used to be just three: producers, users and speculators. The tracker’s sole role is to mimic price movements, and the traditional players compete with trackers for shares of the same asset.
While these are interesting points, we can’t really agree. Commodities futures trading has its roots going back hundreds of years, so the impact of something that’s only been around for 15 years and is still not quite a mainstream investing tool is going to be mild, at best.
Also, while ETFs have made it easier for casual investors to get in, it’s doubtful that the majority of them have the kind of resources to cause the price of oil and other commodities to hit record highs, unlike institutional investors.
- They’re bad for the economy. Sure, they’re out to make money by buying a commodity when they think the price may rise so they can sell it for a profit. But they also help sustain the market for buyers and sellers.
- They’re all secretly communicating and conspiring. On the contrary, speculation is competitive, and there are thousands of them. They often don’t even know who their fellow speculators are.
- They’re super-rich. Yes, some are. But research shows that many of them are big pension and index funds investing on behalf of the average working person.
- The government knows who they are. While exchanges track the activities of their members, they could be a trader one day and a speculator the next.
- They’re creating a bubble. Demand in growing Asian economies with a fixed supply is more responsible for pushing up prices.
- They should be banned. Instead, regulatory changes should be made, such as raising the "margin requirement" to 50% (instead of the current 10%).
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.