Exchange traded funds (ETFs) are cheap, easily accessible, transparent and provide access to a wide range of asset classes. However, one analyst opines that the popularity of commodity and emerging market ETFs may have diminished the overall diversification value. Is it true?
Scott Burns, director of ETF analysis for Morningstar, for MoneyShow believes that the billions of dollars being funneled into commodity ETFs may be tipping the markets, resulting in a supply and demand imbalance in the commodities. [July ETF Assets: Commodities Fall.]
Commodity proponents would point out the diversification benefits of commodities for an investors portfolio, but they would reference data that showed commodities in backwardation – a condition where future commodity prices are lower than in the near delivery months.
However, contango – the condition where long-term contracts are more expensive than near-term contracts – has been rather persistent in the last couple of years. Burns argues that by using ETFs, investors could have been exacerbating the contango.