There’s an ETC for your every need
FANCY investing in emerging market equities, hedge fund performance or copper? If so, then there’s almost certainly an exchange-traded product (ETP) for that. For ETPs are rather similar to the ubiquitous smartphone application: they are cutting-edge, give users fast, simplified exposure to investments and providers can quickly launch in response to user demand.
And as in the smartphone space, competition is hotting up among the providers and especially in the commodity exchange-traded products space. In the second quarter there were 13 providers of commodity ETPs managing almost €32bn of assets. And this week we saw Deutsche Bank’s exchange-traded funds (ETFs) division db x-trackers list 10 new exchange-traded commodities (ETCs) on the London Stock Exchange. This follows the launch of the provider’s ETC platform on the Xetra Frankfurt exchange earlier this year.
They are backed by physical gold and give exposure to a range of commodities from gold and silver to industrial metals via the S&P GSCI Industrial Metals index. The Industrial Metals ETC includes exposure to copper (43.48 per cent), aluminium (30.19 per cent), nickel (11.84 per cent), zinc (8.57 per cent) and lead (5.92 per cent).
There are also a number of booster ETCs, which are designed to optimise the rolling over of commodity contracts through minimising costs from the roll-over. When commodity futures contracts are rolled over, there can be a divergence between the spot price and the future price.
While the db x-trackers’ products give diversified one-stop exposure to commodities, you can also get single commodity exposure via ETF Securities’ ETCs and UBS’s range of ETCs – both listed on the LSE. For example, the UBS CMCI Aluminium ETC aims to follow the performance of the UBS Bloomberg CMCI (CMCI) Aluminium Total Return index. It measures the collateralised returns from a basket of aluminium futures contracts and is designed to be representative of the entire liquid forward curve. The sterling-denominated ETC’s total expense ratio is 0.87 per cent compared to 0.37 per cent for the dollar-denominated product.
And while single industrial metal ETCs have not fully taken off, there is demand from the investment community, says William Adams, head of research at BaseMetals.com. Adams adds that he is seeing increased interest in the ETF sector from the smaller institutional investors such as hedge funds and sovereign wealth funds that do not specialise in commodities but which nonetheless want some exposure to the asset class.
While gold has been going from strength to strength thanks to heightened risk aversion, investors are still looking at the prospects for industrial metals in the light of a renewed global slowdown.
But being more selective in your exposure could yield you better returns. In its quarterly base metals report, Sucden Financial says that only copper and tin “seem to present the most persuasive fundamentals for demand leading prices higher, but other metals present supply-driven bearish risks”.
For copper, we may see another dip, says Steve Hardcastle, head of client services at Sucden Financial, but he adds this should be contained at around $6,250/tonne. Technical analysis points to resistance at around $7,350/tonne. And for tin, the outlook is for solid price performance in the $17,000-$19,000 range but the metal has the technical potential to exceed the January and April highs and reach as high as $20,220. For the more bearish others, at least there’s an ETC that – ETF Securities already offers short ETCs and others are sure to move into the space too.