Commodity ETFs are, well the official name for them is actually commodity ETCs, Exchange
traded commodities.
Which are essentially built to track a particular commodity such as gold for instance.
The key element ETCs offer is diversification in your portfolio, they don't necessarily
enhance returns but certain commodities have... for instance if you are a portfolio manager
and you are very concerned about inflation, gold is typically known to be a good inflation
hedge.
So that's quite often the role it can perform, that and other than it's generally good for
a portfolio to have diversification.
Originally there were significant practical problems by investing in gold for instance.
You would have to receive physical delivery, find somewhere to store it and that was very
impractical, took a long time to execute the trades and deliver the product.
The great thing about ETCs are, you can buy them on exchange, over the internet, over
the phone and it's a trade that can be executed within minutes.
That's the key advantage over originally having to invest in a direct physical product.
ETCs have been performing poorly recently, there's been significant ...the primary reason
why we see this poor performance is significant concerns about China and its economic growth.
A very large proportion of the world's consumption roughly 40% of the world's consumption for
commodities has been through China.
So it's very important what China does and what the government does in China really has
a big impact on commodities.
Now there's been significant concerns about China's economic growth, expectations were
10 years ago for 10% growth and now expectations are for around 6.5% growth.
Looking at some rather unusual or unconventional measures such as electricity consumption,
you can see that in fact growth could even be around 4-5%, so it's much lower.
That's been reflected in the commodities prices and we've seen substantial falls from the
peaks, but our view going forward is actually that China's economic growth is probably set
to plateau and government stimulus is set to be very strong towards 2020 mark.
We're actually seeing an elevated level of consumption from the top 4 commodities for
instance in China are growing at around 9% year on year.
So whilst the market expectations are for that consumption to fall, it just hasn't happened.
And for that and several other reasons, we believe that perhaps we're close to the floor
in commodity prices.
The ETC market is equally divided by United States and Europe and comprises of approximately
$80bn but it reflects quite a small portion of the overall commodity investments.
As an example, for instance, in gold, central bankers typically hold physicals so they don't
need to own the ETCs directly.