When investors think of putting commodity exposure in their portfolios, they most often think of doing one of two things: either buying a broad based fund that provides exposure to a full range of commodities, or buying a gold focused fund. However, the growth of the ETF and ETN market has provided investors with a much broader range of opportunities to build their own portfolio of individual commodities, or add exposure to specific commodities around some existing broad based exposure. Yesterday, I attended the BNY Mellon ETF Symposium in Dana Point, California, and had the opportunity to learn more about two innovative companies that provide targeted exposure to individual commodities.
Teucrium provides investors with smartly constructed ETFs that provide exposure to four key agricultural commodities (corn, wheat, soybeans and sugar) and two energy based commodities (natural gas and crude oil). Teucrium uses commodity futures to build their ETF portfolios, but takes a long-term view when doing so. For them, that means systematic buying of long-dated futures at different expirations so that they avoid some of the volatility in short term commodity prices, along with avoiding the potential cost of rolling short term futures positions.
ETF Securities, a relatively new entrant into the U.S. ETF market, but a major player in Europe, has a focus on precious metals for its product range in the U.S. While their gold ETF is their most popular product in terms of assets, the firm also concentrates on other precious metals, such as platinum and palladium. These two metals actually have a high value for use in manufacturing and jewelry production, have limited supply, and trade in large part based on their supply and demand fundamentals rather than their currency value. ETF Securities backs up their products with high quality research that provides investors and advisors with key insights on each of the precious metals they cover as well as the broader commodity ETP market.
In looking at the long-only commodity categories on Morningstar, most broad based commodity funds that are available are mutual funds, but when it comes to individual commodities or packages of a subset of commoditiies, most funds are ETFs or ETNs (I’ll call them ETPs). Morningstar categorizes the products into the following groups:
- Broad Based (48 funds: 2 closed-end Funds, 14 ETPs and 32 mutual funds)
- Agriculture (31 funds: all are ETPs)
- Energy (22 funds: all are ETPs)
- Industrial Metals (18 funds: all are ETPs)
- Precious Metals (27 funds: 3 closed-end funds, 22 ETPs and 2 mutual funds / 10 of the 22 funds are gold funds)
- Miscellaneous (1 ETP that provides carbon credit plan exposure)
In total, there are 147 funds available to investors. Based on individual views and other portfolio considerations, advisors and investors have the ability to either buy a fully pacakged, actively managed mutual fund that allocates across all categories of commodities, buy an ETP that provides low cost, indexed exposure to a basket of commodities, or get very specific exposure to commodities as needed within a portfolio.
When thinking about commodity investing, it might be time to move beyond just broad based exposure (or gold) and begin to look at the opportunity set within each sub-category of commodities.