Providers make a dash for share of ETC market

WHEN it was announced at the end of last year that investment vehicles traded on exchanges, mostly in the form of index-tracking funds, had passed the $1 trillion mark globally, it was a sign that listed products were growing in popularity. But while exchange-traded funds (ETFs) have made their mark already here in Europe, it is their sister product, exchange-traded commodities (ETCs) that are proving to be the next big growth product.

The volume of these products traded on the London Stock Exchange (LSE) has risen from just £2.6bn in 2007 to £17.6bn in 2009. In the first two months of this year, £4.3bn of ETCs had already been traded. This surge in interest in commodities is unsurprising. At a conference organised by Barclays Capital, two-thirds of investors attending said that they expected financial inflows into commodity markets to beat the $70bn that was invested in 2009. Tellingly, 34 per cent said that ETFs were their preferred way to invest in commodities.

Anxious to capitalise on this growth, banks have been scrambling to launch their own products and gain a portion of the market. Earlier this month, Deutsche Bank’s ETFs arm db x-trackers announced that it had launched four exchange-traded commodities – gold, silver, platinum and palladium – on the Frankfurt stock exchange.

It expects to roll out more than 30 products before June and extend its commodity offering to the rest of Europe over the course of this year.

Not to be left behind, UBS announced days later that it had issued 69 exchange-traded commodities on the London Stock Exchange – the first time the Swiss bank has made a major issuance of ETCs outside Switzerland. These include commodity sector indices, individual commodity indices from aluminium to sugar and even commodity strategy ETCs which track underlying benchmark indexes that are designed to generate alpha.

Gillian Walmsley, product manager for debt and specialist securities at the LSE, says that exchange-traded commodities really have been one of the growth areas because of the product’s simple structure and the access that it gives investors to wide range of commodity markets, which have typically been more difficult for investors to access.

She adds that the recent focus on gold has driven some of the growth in exchange-traded commodities – and indeed precious metals still account for 67 per cent of all commodity exchange-traded products listed in Europe. However, she also points out that the variety of products is expanding, including new commodities and leveraged and short ETCs. While the financial crisis tempered providers’ appetite to launch new products in 2009, 2010 is shaping up to be even better than 2008, when 37 products were launched – in the first quarter 45 have already been issued.

While precious metals remain dominant, different type of commodities have burst onto the market – five agriculture products have already been launched this year compared to 10 in the whole of last year.

Deutsche Bank research shows that there are currently 267 commodity ETPs in Europe – including Switzerland. These are split equally between exchange-traded funds that target broad commodity indices. The remainder is mainly ETCs, which tend to be special purpose vehicles that issue debt instruments and which are directly backed by the assets that the vehicle owns.

Christos Costandinides, ETF strategist at Deutsche Bank, estimates that the European commodity exchange-traded product space will see growth in assets under management of around 60-90 per cent this year. This is slower than the 145 per cent growth experienced in 2009 but Costandinides points out that this is more to do with the maturing of the market rather than any lack of appetite and demand on the part of investors.

“The smaller something is the higher the growth rate when it is growing. The biggest segment – gold – is stabilising but there is no means to say that all the commodities are losing steam,” he says. “2009 was an exceptional year and together with 2008, saw investment that proliferated commodities as an asset class in the ETP space. With the space reaching a critical mass, marginal growth will be harder to achieve.”

Turnover for non-precious metals commodity ETPs will likely increase as more products become available and they continue gaining popularity with institutional investors and active traders, Constandinides says. These are likely to become investment tools for traders hoping to benefit from changing economic trends.

With more traders of all sizes catching on to the benefits of trading the markets using exchange-traded products, demand for access to commodities is only going to increase. While the rate of growth is slowing, the European ETC market has only just started to mature and is still some way from saturation point.

Providers are rightly looking to expand their offerings to cater for this still growing demand.