In Focus: Passive Investing  

Q&A: How investors are using commodity ETFs

Q&A: How investors are using commodity ETFs

With the rise of thematic investing, exchange-traded funds are becoming increasingly popular.

ETFs are a wrapper designed to deliver an investment strategy to an investor, and ETFs give investors the ability to gain exposure to specific sectors or themes via a vehicle listed on the stock market.

The funds can track a number of different assets, and of late commodity ETFs have increased in popularity.

Mobeen Tahir, associate director at WisdomTree, talks to FTAdviser in Focus about the reasons behind the popularity of commodity ETFs - sometimes called exchange-traded products or exchange-traded commodities. 

He also explains their advantages over other instruments and what investors can do to ensure their ETF investments align with their environmental, social and governance values.

FTAdviser: What is behind the recent popularity of ETFs/ETCs?

Mobeen Tahir: Exchange-traded products (ETPs) offer two key benefits. First, they are liquid and can generally be traded more easily compared to other fund structures.

Second, they are transparent; investors know exactly what they are holding making it easier for them to understand the drivers of performance. 

What is behind the recent popularity of commodity ETFs/ETCs specifically?

After being in the doldrums for most of the 2010s, commodity markets have turned around in the 2020s.

And although the drivers of performance may have varied across the different commodity sectors over the last two years, investor interest in the asset class has been revived. Exchange traded products offer transparent, liquid, and often innovative ways to access the asset class.   

FTA: Why do people invest in ETFs, for example are they a currency or inflation hedge?

MT: ETFs offer a simple solution for expressing investment views. This could include gaining access to specific markets, asset classes, or indeed hedging against currency and inflation.

Some ETFs also offer hedged share classes. For example, investors can gain access to foreign markets without incurring the risk of currency fluctuations. Similarly, broad commodity ETFs tend to be popular for hedging against inflation.

FTA: What do commodity ETFs offer as part of a portfolio?

Commodities typically have a low correlation with traditional asset classes like equities and bonds. Within strategic portfolios, therefore, commodities offer a diversification benefit.

Strategic investors also find the inflation hedging properties of broad commodity baskets particularly valuable.

Commodities appeal to tactical investors too, given the strong price moves individual commodities can sometimes exhibit based on their idiosyncratic demand and supply conditions.

FTA: What are the advantages of investing in ETFs, in comparison to direct investment in stocks or funds?

MT: Thematic investing is becoming increasingly popular, and ETFs offer an appealing execution. Investors looking to access specific themes such as those aligned with the energy transition are increasingly finding new and innovative ETF solutions.