The shift towards ETFs have been driven by a number of factors, including lower costs, the tax advantages of equity-based ETFs vs. equity based funds and the liquidity offered by intra-day trading. In addition, ETFs have allowed investors to access physical and/or futures-based exposure to commodities, which have gained favor against equity-based exposure.
Physical Commodity Related Instruments
Total inflows into commodity ETFs during the first half of the year was $4.174 billion, a roughly 25% increase in total assets. The magnitude of this inflow can be measured against $13 million in redemptions that open-end commodity index mutual funds experienced during the same period of time.
Gold Bullion
Similarly to commodity ETFs, gold bullion funds report positive inflows of $2.066 billion for the first half of the year, while gold share index funds had an inflow of $300 million. Actively managed gold share funds experienced $13 million in redemptions, but this figure is small compared against the positive inflows of other gold investment vehicles.
Rising prices and gold’s role as a hedge against a decline in the U.S. dollar have helped drive flows. Meanwhile, long-term liquidation of gold stores has decreased gold supplies, while global industrial development has increased investment demand.
Commodity Equity Funds
In contrast to the overall positive news for commodity ETFs and gold bullion, actively managed commodity equity funds experienced large redemptions totaling $2.370 billion during the same time period—a significant decrease as compared to commodity equity ETFs’ inflow of $1.651 billion.
When viewed in conjunction with the September 2006 correction, during which commodity equity funds saw $2.058 billion in redemptions, it appears investors’ interest in commodity equities is waning. Some say that weakness in the dollar has made physical commodities more attractive, while others believe that ETFs simply provide for easier access to the space. Either way, the trend is clearly favoring ETF-based exposure.
