Following The Money In Commodities ETFs

December 26, 2012

Once the physical metals are removed from the mix, the lion’s share of assets go to crude oil and natural gas, making index 2 look a lot like GSG—albeit a GSG with a higher allocation to gold.

One of the interesting things to note from the exercise so far is how few investors seem to be interested in single-commodity ETPs outside of gold, silver, crude oil and natural gas.

Apart from those four commodities, there are only three commodities ETPs with over $100 million in assets: The ETFS Physical Platinum Shares (NYSEArca: PPLT), the ETFS Physical Palladium Shares (NYSEArca: PALL) and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEArca: JJC).

I also noticed a big coverage gap: There aren’t any single-commodity livestock funds. That might be because the three basket livestock funds, with the exception of the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (NYSEArca: COW,) have been terribly unpopular. Even COW only has $66 million in assets, but I found that fact interesting all the same.

The last basket I constructed is based on the sector commodity ETPs on the market. Rather than look at single commodity funds, I looked at the funds that specifically try to capture a sector, be that agriculture, energy, etc. I also included sub-sectors like grains, softs and livestock, which I rolled up into the four broader sectors. The difference between the sector-based commodity index I constructed and the commodity ETPs on the market is even more striking.

Index 3: ETP AUM Commodity Sector Index

None of the five broad ETPs mentioned above come close to matching the ETP AUM Commodity Sector Index’s massive allocation to agriculture or miniscule allocation to energy, though USCI comes the closest.

I have two possible interpretations of the AUM-based indexes.

The first is based on the assumption that commodities ETP investors are buying broad-basket funds and using the single-commodity and sector ETPs to supplement their basket exposure to get the allocations they like. That interpretation would imply that investors want a basket with more exposure to agricultural commodities and precious metals, mostly gold.

The other interpretation assumes that the investors buying single-commodity and sector ETPs are doing so tactically and are not, at the same time, also buying an imperfect basket that requires supplementation. That interpretation is less actionable, unless you’re a follow-the-money investor.

Ultimately, the choice of commodities exposure will come down to your own investment ideas and the fund or combination of funds that best fit those ideas.

And, fortunately, investors do have plenty of choices. There are currently 109 unleveraged exchange-traded commodities products on the market, so in all likelihood the products are out there to fit most everyone’s needs.

At the time this article was written, the author held shares of DBC. Contact Carolyn Hill at [email protected].

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