Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Commodity ETF flows: Broad demand despite weakness
Ole Hansen
Head of Commodity Strategy
Summary: A roller coaster month across markets is ending and, in this update, we take a closer look at how commodity investors through the tracking of ETF flows have responded to the latest developments. Not surprisingly we are seeing large flows into gold, but also Brent as the price broke support. Also, using natural gas as an example we warn about the use of leveraged ETFs unless it is used for short-term tactical strategies
Today's Saxo Market Call podcast
Global Market Quick Take: Europe
A roller coaster month across markets is ending and, in this update, we take a closer look at how commodity investors through the tracking of ETF flows have responded to the latest developments, not least the biggest banking crisis since the 2008 Global Financial Crisis which together with rising recession concerns also triggered a major slump in bond yields across the Western world, while forcing a major rethink about the future direction of key central bank rates. The Bloomberg Commodity Index trades softer by around 1.3% on the month with losses in energy, led by a 25% slump in natural gas, being partly offset by gains in gains and not least precious metals.
The table below show some of the world’s largest and most actively traded commodity ETF’s, their recent performance and not least investor flows. There are hundreds of different ETFs tracking commodities so the list is by no means exhaustive and should primarily be used for information and inspiration.
The first section are UCITS-compliant ETFs. Based on an EU directive that provides a regulatory framework for funds that are managed and based in the EU. A UCITS fund can be marketed to and traded by private investors because it adheres to common risk and fund management standards, designed to shield investors from unsuitable investments.
The second part of the table shows mostly US listed, and therefore non-UCITS compliant ETFs. It’s among this group we find some of the world’s biggest ETFs in terms of market cap, led by the GLD and IAU, two ETFs that tracks the performance of gold. It is also worth noting that due to changed taxation rules by the US Internal Revenue Service from January 1, 2023, Saxo no longer offer access to cash trading in PTP securities as non-US persons in general will incur an additional 10% withholding tax on gross proceeds from the sale, trade, or transfer of U.S. PTP securities. The change has undoubtedly increased the popularity of European issued ETFs as non-US investors have either opted to close or switch their exposure to similar ETFs outside the US PTP framework.
We chose to show the PTP registered ETFs given the signal value they can provide, but also the fact that traders understanding the additional risks of holding leveraged positions can still trade these as CFD’s.
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.
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