Commodity ETF flows: Broad demand despite weakness

Overall, the commodity that has managed to attract the biggest inflow is gold with IGLN and GLD attracting more than $1.8 billion in net flows during the past month, thereby reversing months of net selling. In Europe, two Bloomberg Index tracking ETFs, the ROLL and ICOM, both saw significant inflows as well despite the overall lacklustre performance of the asset class. 

Three of the best-known commodity indices that are tracked by billions of dollars are the Bloomberg Commodity index, the S&P GSCI as well as the DBIQ Optimum yield diversified commodity index. Above we find several ETF providers offering access to these three. We prefer to track the Bloomberg Commodity Index given its specifications which says that no sector weight can exceed 33%, and no single commodity weight can exceed 15%. This in stark contrast to the S&P GSCI which has a 61.5% exposure to energy, 23,8% to agriculture and only 14.7% to metals.

The sharp sell-off in crude oil that followed months of range bound trading helped attract fresh demand from investors seeing the correction being more about speculative traders being forced to rapidly reduce exposure, than an overall deterioration in the fundamental outlook. Also, it is worth pointing out that Brent with its forward curve structure in backwardation continues to be favoured over WTI which continues to trade in contango. The resulting difference in return between BRNT (Brent) and CRUD (WTI) can be seen in the table above. 

Finally, a health warning about leveraged ETFs

Normally we do spend much time on leveraged ETFs, products that are often ill understood by investors and together with their dismal ability to track over time the performance of the underlying instrument, they are best left alone or only used for very short-term directional trading strategies. 

As humans we are often attracted to mean reversal trades, i.e., looking for a market that has fallen to rise and vice versa. A classic example of this being the BOIL ETF which seeks daily investment results that correspond to twice (200%) the performance of the Bloomberg Natural Gas Sub-Index. During March the ETF has despite a 47% price collapse managed to attract $235 millions of fresh investor flows, and in order to recoup that loss the ETF now needs to rally 87%.

Held over a long period of time this ETF is very difficult to manage and the one-year loss of 93% tells a story, not only about the current weakness in natural gas, but also a very elevated contango that eats into your return at each underlying futures roll. During a five-year period, the front month natural gas contract trades down 25% while the BOIL ETF has lost close to 99% of its value.