From A(luminum) To Z(inc)

September 05, 2006

ETF Securities announces plans to launch 29 new commodities ETFs, including 19 individual commodity funds.

ETF Securities - the team behind the first gold bullion and oil exchange-traded funds (ETFs) - announced plans to launch 29 new exchange-traded commodity funds (ETCs) onto the London Stock Exchange (LSE).  The new funds include 19 separate individual commodity ETFs, 9 "sector" funds and 1 broad market fund tied to the well-known Dow Jones/AIG Commodities Index (DJAIG-CI).

The company says it will roll out the entire platform of products "over the next few weeks."

The 19 individual funds cover the following commodities, with each fund tracking its own individual commodity index (The indexes were launched by Dow Jones-AIG  in April of this year):

Aluminum

Crude Oil

Live Cattle

Soybeans

Coffee

Gasoline

Natural Gas

Sugar

Copper

Gold

Nickel

Wheat

Corn

Heating Oil

Silver

Zinc

Cotton

Lean Hogs

Soybean Oil

 

Importantly, the indexes - and the ETCs - reflect the performance of an investment in futures for each commodity, not the underlying spot price of the commodity itself.  A futures investment has three elements to its return: the spot price, the interest earned on collateral cash invested in Treasuries, and the "roll yield" from "rolling" the futures position from expiring contracts to fresh contracts each month.

Often, the "roll yield" is the largest single factor in the return. Historically, that has been good news for investors, as the "roll yield" for most commodities has been positive. Recently, however, many commodities futures have traded in "contango," with futures investments losing to spot prices in tight markets like oil.

Of course, that could change at any time.

The sector funds, for their part, track futures-based indexes created by Dow Jones, comibining the individual product futures into nine groups:

Agriculture

Ex-Energy

Livestock

Energy

Grain

Petroleum

Softs*

Industrial Metals

Precious Metals

*Softs are tropical agricultural products like sugar and cotton.

 

 

The "All Commodities" fund tracks the traditional Dow Jones - AIG Commodities Index, one of the most recognized commodities indexes.

"Since launching the first ETC more than 3 years ago, we have seen huge demand for new products," said Graham Tuckwell, chairman, ETF Securities. "With the launch of a record-breaking 29 new securities, we are enabling investors to tap into the ever-increasing appetite for commodities and to trade easily and cheaply on a single platform."

Investors are sure to embrace the funds on many levels.  For starters, the "All Commodities" fund will appeal to investors as a strong, diversified commodities index fund.  The DJ-AIG is widely considered one of the more appealing commodity indexes.

The sector and index funds, in turn, will appeal largely to traders and market timers, as well as investors looking to play individual themes in the market. For instance, many analysts expect corn prices to rise in coming months, as demand for ethanol meets a poor corn crop.  Other users can use the funds to hedge against downturns in certain industries, isolating the performance of the industry from the price movements of its materials.

Similarly, plays on energy (or ex-energy) commodities have an obvious appeal.

The nickel fund is sure to be controversial - and popular - if recent shortfalls in the nickel supply continue.  The London Metal Exchange was forced to intervene in the nickel market in August for the first time since to 1980s, to curb panic buying after analysts said there were only "hours" worth of nickel left in global stockpiles.

Whether some of the more obscure contracts - say, soybean oil - attract attention depends on whether they can steal mind- and market-share away from acutal futures among sophisticated investors.  That strikes some as a long shot, but you never know.

The question for U.S. investors is when they will get their first taste of the individual commodity ETFs. Given strong potential demand, it's probably only a matter of time.

"Commodities used to be considered an 'alternative' investment but due to the development of global capital markets and new financial products like ours, that provide simple market access, commodities are becoming widely accepted as a mainstream asset class."

ETF Securities currently has over $2 billion in its global family of ETCs; that number is sure to grow.

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