Australian Securities Exchange (ASX)-listed exchange-traded funds (ETF) have had a blaze of publicity in the past 12 months as more ETFs are launched into a market that is growing rapidly off a low base.
A related product, exchange-traded commodities (ETC), have had less fanfare. This is despite the commodities boom and sharp sell-off in commodity prices in recent weeks creating opportunities for long-term investors and traders, and for self-managed superannuation funds wanting low-cost, long-term commodity exposure.
Six ASX-listed ETCs had combined market capitalisation of $689 million in April, a 15 per cent gain on the year, ASX data shows. That is tiny in the context of an Australian share market capitalised at $1.42 trillion, and the ETC market is growing much slower than the ETF market, which grew 39 per cent to $4.7 billion in the year to April.
ETCs and commodity-based ETFs are huge business overseas, and futures contracts are another way institutional investors play commodities, such as oil.
The Economist reported last year that gold ETFs bought 25 per cent of global gold production in 2009.
There is a good chance more ETCs will list on the ASX and the market will continue to grow.
One of the more interesting listings this year was BetaShares Capital's new hedged gold ETF. It gives investors low-cost exposure to physical gold without currency risk.
The rising Australian dollar has crunched returns on gold. In a statement, BetaShares said the US dollar gold price rose 33 per cent a year in the two years to April 2011, compared to an 18 per cent annual return in the S&P/ASX 200 index.
In the past 10 years, gold investments hedged for currency movements returned almost 5 per cent more than unhedged gold investments.
Of course, interest in ETCs and commodity-focused ETFs depends heavily on the commodity boom's sustainability. The US dollar gold price was up 27 per cent in the year to 20 May 2011, ETF Securities data shows. In US dollar terms, silver was up 99 per cent, palladium rose 79 per cent, copper gained 37 per cent and oil increased 56 per cent over 12 months.
But commodities sold off heavily in late April and May. Silver slumped 22 per cent and palladium, copper and oil fell less than 10 per cent.
Stronger-than-expected inflation in China stoked fears of monetary policy tightening and European sovereign debt problems intensified. Broader concerns that the global economic recovery is weakening led to investors selling risk assets and taking profits on commodity investments.
Long-term believers in the commodity and resource stocks story could use bouts of commodity price weakness to rebuild positions through ETCs and resource-focused ETFs.
As Investor Weekly noted in February: "It's the billion-dollar question that, more than any other, could affect fund performance in 2011: when do investors move away from the reflation trade of emerging markets, commodities, resource stocks and small caps to developed markets and more defensive blue-chip industrial and finance stocks?"
It is too early to know the answer to that, but based on the commodity sell-off in recent weeks and ETC fund outflows overseas, many investors are not waiting to find out.
