ETF Commodities

thrupence

What are the extra risks in investing in ETF commodities?

I'm thinking here of the counter party issue we saw with AIG, not whether or not commodities in themselves are risky.

And are ETF commodities OK for long term investment, or are they better seen as for relatively short term trading?

Thanks, and happy New Year to all!!

wombat42_2

You might like to consider Marlborough ETF commodity fund
http://www.h-l.co.uk/funds/security_details/sedol/B195JD8

It is one of the very few actively managed pure commodity funds based on ETFs. It must be the least risky way of investing in commodities and it allows shorting. It tanked far less in 2008 than commodities did thanks to shorting and a cash element.

cagey76

asked a similar question earlier, AIG have been bailed out, so its unlikely that those etfs that are backed by them will fail, but I'm not sure thats a 100% guarantee.

its worth noting that some etf's are based on real holdings, I'm thinking of physical gold and silver, you own part of an actual physical holding.

http://forums.moneysavingexpert.com/showthread.html?t=1383789

jon3001

thrupence wrote: »

I'm thinking here of the counter party issue we saw with AIG, not whether or not commodities in themselves are risky.

They should be safe from counterparty risk. Regarding ETCs tracking the futures market, as mentioned, AIG is basically nationalised by the US government. The Physical Gold/Silver/etc are backed by metals held by HSBC (very large and [hopefully!] sound bank) in accounts specifically allocated to the ETC.

thrupence wrote: »

And are ETF commodities OK for long term investment, or are they better seen as for relatively short term trading?

The Short and Leveraged ETCs seem to be for traders and aren't really suitable for long-term buy-and-hold. The Marlborough ETF commodity fund mentioned by Wombat makes tactical use of Short ETCs and the fund itself is suitable for long-term investment.

If you prefer to invest in a passive index of diversified commodity futures for the long-term then I'd consider ETFS Forward All Commodities DJ-AIGCI-F3SM (FAIG). The Forward ETCs tend to maximise exposure to beneficial roll-yield, an important component in the returns of commodity futures.

mr_fishbulb

thrupence wrote: »

What are the extra risks in investing in ETF commodities?

Commodities are priced in US $s and I'm guessing you will be buying and selling in GB £s.

Exchange rate between the two was very volitile in 2008 so you need to take this into account or at least be aware of it.

For example I bought some gold in Feb 2008 when it was over $920 an ounce and there were almost $2 to the £. Now Gold is $875 an ounce but there are under $1.5 to the £ so I've made a little profit (but not how I thought I would ). My silver on the other hand is a different story......

wombat42_2

Looking a the latest data for Marlborough ETF
http://www.h-l.co.uk/funds/fund_analysis/sedol/B195JD8t

I was surprised that 50% the fund is currently in cash. The fund has gone down less than half than commodities and moving into cash obviously paid off.

jon3001

mr_fishbulb wrote: »

Commodities are priced in US $s and I'm guessing you will be buying and selling in GB £s.

Exchange rate between the two was very volitile in 2008 so you need to take this into account or at least be aware of it.

For example I bought some gold in Feb 2008 when it was over $920 an ounce and there were almost $2 to the £. Now Gold is $875 an ounce but there are under $1.5 to the £ so I've made a little profit (but not how I thought I would ). My silver on the other hand is a different story......

I think it's important to note the dangers of volatility in investment markets, especially when it comes to individual commodities such as silver.

One way to inoculate yourself against some of the downside is to phase the money in over 12-24 months. For ETCs you need to consider trading costs; my minimum trade is usually £500 - so a £10 dealing charge would represent a 2% cost.

If you can't afford to deal every month then do it every few months. E.g. for a £2000 investment in an ETC:
Jan 09: £500
May 09: £500
Sep 09: £500
Jan 10: £500

jon3001

wombat42 wrote: »

Looking a the latest data for Marlborough ETF
http://www.h-l.co.uk/funds/fund_analysis/sedol/B195JD8t

I was surprised that 50% the fund is currently in cash. The fund has gone down less than half than commodities and moving into cash obviously paid off.

Yes - it did well to sidestep the recent market declines. The large cash holdings are a bit of a concern to me though. It does indicate strongly that they're trying to time the market which is notoriously difficult and has to be done very accurately to pay off. The danger is that if there's any sudden rebound in the market they'll miss it.

If they thought markets were fundamentally overvalued then I'd expect more use of Short ETCs. Given the steep declines in crude oil you'd think there could be some value there now. Supply hasn't improved and if economies recover from recession in 18 months or so that's going to put an inevitable squeeze on prices again.

Despite the large cash holdings and short history is does look an interesting fund and I do like the use of Short ETCs. I've not bought it yet but will probably build up a position (via portfolio rebalancing/regular savings) to complement FAIG.

wombat42_2

jon3001 wrote: »

Yes - it did well to sidestep the recent market declines. The large cash holdings are a bit of a concern to me though. It does indicate strongly that they're trying to time the market which is notoriously difficult and has to be done very accurately to pay off. The danger is that if there's any sudden rebound in the market they'll miss it.

If they thought markets were fundamentally overvalued then I'd expect more use of Short ETCs. Given the steep declines in crude oil you'd think there could be some value there now. Supply hasn't improved and if economies recover from recession in 18 months or so that's going to put an inevitable squeeze on prices again.

Despite the large cash holdings and short history is does look an interesting fund and I do like the use of Short ETCs. I've not bought it yet but will probably build up a position (via portfolio rebalancing/regular savings) to complement FAIG.

But in first half of the year the Marlborough fund was probably the top unit trust fund peformer in any market sector over the previous 6 months and 12 months . Even now it is still up over the last 12 months. It is certainly less volatile than commodities. Early 2008 I cant remember what its cash element was but dont think it was more than 10%. Shorting is potentially more risky surely than holding cash - and with cash there will be some interest. Cash is a neutral position. I would expect that the fund would reduce the cash element over time. Commodities are expected to pick up in the second half of 2009.

jon3001

wombat42 wrote: »

But in first half of the year the Marlborough fund was probably the top unit trust fund peformer in any market sector over the previous 6 months and 12 months . Even now it is still up over the last 12 months. It is certainly less volatile than commodities.

I'm not sure which part of my post this 'but' is addressing. On the performance side it's -18% @ 6 months and +7% at 12 months. I expect market sectors such as global bonds have done far better. I'm not sure how that's relevant to someone wanting exposure to commodities. If someone's trying to time the best sector to be in then it's relevant.

wombat42 wrote: »

Early 2008 I cant remember what its cash element was but dont think it was more than 10%. Shorting is potentially more risky surely than holding cash - and with cash there will be some interest. Cash is a neutral position. I would expect that the fund would reduce the cash element over time. Commodities are expected to pick up in the second half of 2009.

A 50% cash holding does present issues for someone using funds as part of an asset allocation strategy. Say someone has a £100K portfolio and wanted a 10% allocation to the movement of commdity futures. With an ETC such as FAIG they'd just buy £10Ks worth. However they'd need to buy £20K of the Malborough fund to get same £10K exposure. Then they'd have to take account of an additional £10K cash in the portfolio by maybe reducing cash and bonds elsewhere.

An asset allocator would prefer funds to be more fully invested and they'd control their own investment/cash mix.

cloud_dog

Guys, I think you are discussing a non-issue (50% in cash).

a) Its up to the fund manager to mange the fund - hence the big charges

b) The Fact Sheet is a statement at a point in time (1st Dec 08)

c) They don't updatethe fact sheet very often - its already a month out of date

I took a small position in this fund after the recent melt down and continue to add via monthly investments.

cloud_dog