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.
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.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
