Commodity and currency-based ETFs are gaining popularity as investors disappointed with poor returns on traditional investments like stocks and bonds look to diversify their holdings.
According to a new report from research firm Aite Group, assets under management in commodity ETFs hit $118 billion at the end of October, up dramatically from slightly more than $1 billion in 2004. Currency-based ETFs, meanwhile, grew eightfold, from less than $1 billion at the end of 2006 to just under $8 billion at the end of October. Together, they represent about 12% of the overall ETF assets under management, according to Aite.
Commodity and currency ETFs are very compelling given the stock market’s poor performance over the last 10 years and today’s near-zero interest-rate environment, said Howard Tai, senior analyst with Aite Group and author of the report, in an interview. “Investors are not going to get anything out of CDs or money market funds, and it’s just too risky to pour most of one’s life savings into long-term maturity bonds at these low historical interest-rate levels,” he said. “Investors need to diversify away from stocks and bonds.”
According to the report, commodity-based exchange-traded products, particularly those that invest in gold, are one of the fastest-growing alternative sectors of the exchange-traded marketplace, growing faster than traditional equity and fixed income exchange-traded products. From the end of October 2009 through the end of October 2011, assets under management in commodity exchange-traded products grew 40% and 20%, respectively, while growth in equity ETFs slowed.
Currency ETFs have also had a strong growth trajectory, triggered in part by the global financial crisis in 2008, when investors around the world learned the importance of “asset diversification away from traditional, equity-centric investments,” writes Aite in the report. “Currency investing and trading,” the report explains, “is one way in which uncorrelated returns to stock market’s returns can be achieved.”
In addition to the asset diversification they provide, commodity and currency ETFs have cost advantages over mutual funds. Management fees for commodity exchange-traded products range from 25 to 150 basis points of assets under management, with the majority of funds charging 75 basis points. The management fees of managed futures can easily be double or triple these amounts, according to Aite.
As to currency exchange-traded products, expense ratios range from 35 basis points to 90 basis points. Currency mutual funds all charge a minimum of a 1% annual fee, with many averaging 125 basis points annually.
Possible challenges ahead, however, could impact growth rates, including high fluctuations in commodity prices and currency exchange rates, Aite noted. In addition, the rollout of Dodd-Frank rulings and the streamlining of regulatory oversight issues might make it more difficult for new commodity and currency ETF launches to occur in 2012.
Margarida Correia writes for Bank Investment Consultant.