Brandon Rakszawski, director of ETF product development at VanEck, says most commodity products are still being used by institutional traders, especially after investors of all sizes were burned during 2008’s market crash.
“2008 was a difficult experience for a lot of investors who were either chasing returns or were trying to diversify a portfolio and look for uncorrelated assets,” he explained. “At the time, everything correlated in a way. Commodities just happened to fall further than a lot of other markets.”
Sal Gilbertie, founder of Teucrium Funds, issuer of agricultural ETFs, says the new generation of ETFs that dynamically address roll yield, or allow for long-term trading, have been vast improvements. But he adds that that first generation of ETFs “actually did a lot of structural damage,” keeping people away from commodity ETFs. Some of that sentiment lingers today, with trading platforms not wanting to carry ETFs based on derivatives, Gilbertie notes.
Rakszawski concurs that a lot of individual investors haven’t gotten back into commodities; much of the business stems from institutions that see commodities having a place in a traditional asset allocation model.
He says that, aside from precious metal ETFs like the SDPR Gold Trust (GLD) or the iShares Gold Trust (IAU), commodities’ AUM is small. Of the $66.7 billion in 125 U.S. commodities-based ETFs, $32 billion is in GLD. Rakszawski notes tax issues are another factor, since commodity-pool ETFs issue K-1 tax forms rather than 1099s, which can cause investors headaches. A few commodity ETFs are starting to address the tax issue to structure the funds so as to avoid K-1s.
Bloom says he started to see some financial advisors returning during 2017’s synchronized global growth, a weaker dollar and a pickup in Consumer Price Index growth. That’s when some individual financial advisors looked at commodities as a way to get direct exposure to rising inflation. “People started realizing, ‘Hey, commodities are cyclical,’” he said.
Boal notes that because commodities are still not well-understood by people familiar with equity or fixed-income investing, S&P is developing commodity indexes that embed a covered-call option strategy, which, at certain periods, allow the holder to take an income stream. That’s unusual for commodities, since they usually don’t generate income, and that might help attract investors.
“We’re really moving toward a lot of products that would be similar to the sorts of things you see in the equity and fixed-income markets,” she added, “but also products that allow you to capture some of those very unique risks that are apparent in the underlying commodity markets.”