As commodity ETFs have witnessed increased investor demand and increased returns over this year, there have many new resource-specific ETFs brought to market and now the United States Commodity Funds plans to introduce three more funds giving exposure to copper, agriculture and metals.
The three aforementioned resource-specific commodity sub-sectors have been at the pinnacle of performance during the last 12 months and are expected to continue to shine in the near future. Copper, which is used in pipes, tubing, wires and other industrial uses, is expected to witness increased demand over the next few years as global economies, in particularly in emerging markets like China and India, continue to grow. In fact, global demand of copper is expected to outpace supply in 2011, the first time in four years, giving the metal even further positive price support.
As for agriculture, there is expected to be a major imbalance in global food supply and demand. Unfavorable weather conditions around the world have resulted in weaker than expected wheat, sugar, cattle, corn and soybean production whereas demand for all these commodities has increased. Furthermore, populations around the world continue to grow and the purchasing power of emerging markets continues to increase further pushing up consumption and demand for food in regions of the world that once were not major demand drivers.
On the metals forefront, base metals, such as aluminum, nickel, tin, copper and lead are expected to witness positive demand support due to increased global economic growth. Precious metals, gold and silver are likely to remain favorable amongst investors as developed nations like the US continue to implement loose monetary policies which could eventually lead to the devaluation of the Dollar. Platinum and palladium, the two other precious metals, are expected to remain in demand as well due to their vital role in the reduction of emissions in automobiles and heavy-duty diesel driven trucks.
United States Commodity Funds first proposed ETF is the United States Copper Fund,which is expected to hold futures contracts in copper and use a unique weighting and roll strategy depending on whether or not the copper market is in contango or backwardation. Contango is when futures contracts that are nearing expiration are cheaper than longer dated contracts which could eat away at returns. Backwardation is the opposite phenomenon of contango.
The second proposed ETF is the United States Agriculture Index Fund, which is expected to track the SummerHaven Dynamic Agriculture Index, which gives exposure to 14 different agricultural commodities including soybeans, corn, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, coffee, cocoa, cotton, live cattle, feeder cattle and lean hogs. Each of these commodities is assigned a base weight based on market liquidity and the respective commodity’s economic strength.
The last ETF is the United States Metal Index Fund, which is expected to include both base and precious metals holdings. The index that the fund is expected to track holds ten metals including aluminum, copper, zinc, nickel, tin, lead, platinum, palladium, silver and gold. In regards to asset allocation, each metal will be allocated a base weight based on market liquidity and the overall economic importance of the respective metal.
In a nutshell, these three ETFs are expected to utilize a strategy which mitigates the effects of contango on returns and is expected to be brought to market by an ETF provider who has a good track record demonstrated through the United States Oil Fund (NYSE:USO), the United States 12 Month Fund (NYSE:USL) and the United States Natural Gas Fund (NYSE:UNG).
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.