The heavy Energy weighting in the S&P GSCI index accounts for the EasyETF GSCI fund's bottom-of-the-table performance for 2008, while Market Access's RICI ETF follows closely behind, apparently due to its overweighting of Brent crude and some of the poorer-performing industrial metals like lead and zinc, and its underweighting of the precious metals by comparison with the DJ-AIG and CRB indices.

The db x-trackers DBLCI-Optimum Yield ETF performed relatively better than the other ETFs. The "optimum yield" index uses a formula-based optimisation strategy that seeks to maximise the positive roll yield - minimise the negative roll yield—as it buys and sells commodities. Rather than simply purchasing the near-month contract, or even a contract a fixed number of months out, it evaluates all available contracts and selects the most advantageous month. Deutsche Bank's calculations—admittedly, based on back-testing - show that the DBLCI-OY index methodology has also beaten the GSCI and DJ-AIG indices by a wide margin on a longer-term view as well.

Follow The Money?

Where have investor cash flows been heading within the commodity sector as a whole?  Despite all the interesting intricacies involved in deconstructing the commodities futures curves, most investor funds within the ETF/ETC space have gone straight into gold. Indeed, the three major European gold tracker funds—Gold Bullion Securities, ETFS Physical Gold, and ZKB Gold ETF—now have assets totalling over US$ 8 billion, dwarfing the money invested in other areas. This represents a major success for the relevant ETF/ETC providers—ETF Securities and ZKB—but is must also present them with a challenge, since they would undoubtedly like to diversify their businesses more.

Having said that, the prospects for gold and the other precious metals seem unlikely to dim this year, and indeed they may not for a few years to come. With the credit crunch showing no signs of abating, and government solvency increasingly in question, investor demand for non-fiat currencies seems well underpinned. 

Future Prospects

After the dramatic fall in commodities prices during the second half of 2008, this year has got off to a stronger start. A number of the diversified ETFs highlighted above have seen decent inflows, investors continue to buy the precious metals (with gold breaching the US$900/ounce barrier again) and, as we have reported in the news section of the site, there are signs of a jump in demand for energy and agricultural ETCs. ETF Securities' recent annual review points to historically low inventories of a number of industrial metals, and also to the fact that global stocks of corn, wheat and soybeans are at their lowest levels since 1974.

So even if the global recession is putting a brake on the demand side for commodities, supply constraints should help to underpin prices. And the bubble-like atmosphere of early 2008 has certainly disappeared, allowing investors to access the sector on more favourable terms. All in all, 2009 should be a better year for commodity ETFs/ETCs.

1 | 2 | 3 |