Q&A: How investors are using commodity ETFs

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Q&A: How investors are using commodity ETFs

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?

Gold products have generally been around [as an investment] for longer than other commodities.

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.

The true value-add comes when ETF providers partner with industry experts to offer all the benefits of active management within a systematic, and transparent ETF. 

FTA: How can investors square ESG concerns with commodity based investments?

MT: Certain physically backed commodity products, particularly in the precious metals sector, now follow responsible sourcing guidelines. This offers a cushion of comfort for investors with regards to their physical commodity holdings.

The push towards green energy is expected to favour metals including copper, nickel, aluminium, tin, and zinc.

If investors take a holistic view of commodities and consider the end use, it may become easier to square ESG concerns. For example, the energy and transportation sectors collectively account for nearly three quarters of the world’s greenhouse gas emissions.

The use of green commodities, such as copper, in the electrification of transport and transition of the power sector towards renewables is enabling the push towards a greener world. 

FTA: What are the top 5 most popular commodity ETFs, and what are the most popular commodities to be exposed to?

MT: Top commodity exchange-traded products in the world by assets are dominated by gold but also feature silver and broad commodities.

Gold products [as an investment] have generally been around for longer than other commodities and the asset class continues to make a case in strategic asset allocation due to its diversification benefits. 

Increasingly, however, attention is drawing towards industrial metals that stand to benefit from emerging technological trends.

The push towards green energy is expected to favour metals including copper, nickel, aluminium, tin, and zinc. These commodities are redefining themselves as ‘thematic’ (aligned with long term themes) rather than cyclical (merely linked to the economic cycle). 

FTA: Which geopolitical trends have the potential to act as head or tailwinds for ETFs’ popularity over the next three to five years?

MT: Digital assets are quickly moving from the peripheries into the mainstream of investing. As the adoption of digital assets accelerates around the world, exchange-traded products are likely to benefit due to the innovation and ease of access they offer in this space.

sally.hickey@ft.com