08/07/09 ETF Securities: Commodity Returns Surge in 1H 2009, Outperforming Other Major Asset Classes

Commodities best performing major asset class in 1H 2009, outpacing equities, bonds and cash…

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• ETFS Copper up 58% making it best performing exchange traded commodity (ETC), followed by gasoline, palladium and oil.
• Investor flows into ETCs surge 34% above pre-crash July 2008 levels, doubling assets under management (AUM) to $12bn in six months.
• The buy/sell ratio for ETCs tracking diversified commodity indexes surged to 5.8:1 in 1H 2009, highlighting the strength of interest in commodities as an asset class.
• Strongest flows into gold and oil, with inflows into natural gas, agriculture and industrial metals playing catch up.

Commodities were the best performing major asset class in 1H 2009, outperforming developed market equities, bonds and cash. Commodities have also been the best performing major asset class over the past ten years, with commodity returns as measured by ETFS Forward All Commodities DJ-UBSCI-F3SM Index up 270% in the ten years to 30 June 2009 compared to a 27% decline in the Dow Jones Euro STOXX 50, a 7% decline in the FTSE 100, a 24% decline in property1 and a 72% return on bonds2. This outperformance was achieved with an average annual volatility3 of 15%, lower than the annual volatility of 22% for the Dow Jones Euro STOXX 50 and 20% for the FTSE 100 over the same period. Asset Class Returns Compared (1H09 and Past 10 Years)

Investor flows into commodities surged during the first half of 2009, with AUM in ETF Securities’ ETCs rising by over $6bn to $12bn over the period. Gold and oil saw the largest investor demand in 1H 2009, but over the past two months natural gas, industrial metals and agriculture have experienced the most investor inflows. By 30 June 2009, net cumulative flows into all ETCs had surged 34% beyond 1 July 2008 levels, highlighting the strength of investor interest in commodities.

In terms of investor positioning, diversified exchange traded commodities such as ETFS All Commodities DJ-UBSCI^SM had the highest buy/sell ratio of any sector in 1H 2009, with the ratio rising to 5.8:1 by the end of the first half. The strength of the buy to sell ratio for the ETCs tracking the broadest commodity indexes highlights the extremely strong positive sentiment towards the asset class this year. By sector, agriculture saw the highest buy/sell ratio, with a ratio of 3.5:1. Although energy ETCs saw the second largest inflows of any commodity sector, their buy/sell ratio was one of the lowest, with a ratio of 1.8:1, as extremely strong oil inflows in the first four months of the year and surge of inflows into natural gas ETCs in the last two months of the first half were partially offset by outflows in May and June from ETCs tracking shorter-dated oil futures returns.

Industrial metals were the strongest performing sector over the past six months, with ETFS Industrial Metals up 28% in 1H 2009, led by a 58% rise in ETFS Copper, a 30% rise in ETFS Nickel and a 23% rise in ETFS Zinc. ETFS Aluminium lagged the other metals, rising by 15% in 2Q 2009 but only rising 1% in 1H 2009 due to weak performance in 1Q 2009. Flows into industrial metals ETCs have been rising at a rapid rate since beginning of February 09, with total flows 1H 2009 up $149mn, bringing cumulative flows into industrial metals ETCs to levels 27% above the previous high in March of 2008.
Top Ten Long and Short ETC Performance – 1H2009

Source: ETF Securities

Within precious metals, the strongest performers were metals tied to the industrial cycle, with ETFS Physical Palladium surging by 35%, ETFS Physical Platinum up 32% and ETFS Physical Silver up 29%. With risk appetite increasing during 1H 2009, ETFS Physical Gold (PHAU) and Gold Bullion Securities (GBS) lagged more cyclical assets, rising by 7%, after being the best performers during 2008. Interest in holding physical gold remained strong, however, with $2bn (a 54% increase over year ago levels) flowing into ETFS Securities’ physically backed gold ETCs as strategic investors continued to build positions to hedge against potential future inflation, currency debasement and counterparty risk. Total assets in ETF Securities’ physically-backed gold ETCs at the end of 1H 2009 stood at $ 7bn, making them the largest ETF/ETC gold holdings in Europe.

Performance in the energy sector was mixed with a 58% rise in ETFS Gasoline, a 33% rise in ETFS Brent and a 14% rise in ETFS Heating Oil offset by a 42% decline in ETFS Natural Gas. Flows into oil ETCs during 1H 2009 were unprecedented, rising to a peak of $1.5bn by the end of April, 1,458% more than total inflows during the same period last year. The flows began in late October 2008 as the oil price plunged through $50/bbl down towards the $30/bbl level. Since early May however, following a doubling of the spot oil price, flows into oil ETCs tracking short maturity oil futures returns such as ETFS Crude Oil, ETFS Brent and ETFS WTI have started to reverse, with investors moving into longer-dated oil ETCs such as ETFS Brent 1yr and into ETFS Natural Gas and ETFS Leveraged Natural Gas. In May and June alone, inflows into natural gas ETCs rose by $472mn, 3.8 times total inflows since listing in September 2006. Towards the end of the first half investor flows into ETFS Short Crude Oil also started to rise, though short flows have not yet approached the levels seen in July of 2008 when short oil flows rose by over $300m just before the oil price plunged.

Agriculture saw similarly divergent trends with ETFS Softs up 14% while ETFS Grains fell by 5%. ETFS Softs (which tracks the futures returns of sugar, coffee and cotton) was pushed higher primarily by a surge in sugar prices, with ETFS Sugar up 32% in 1H 2009. Despite ETFS Soybeans rising 16%, ETFS Grains was held back by the poor performance of ETFS Wheat (down 19%) and ETFS Corn (also down 19%). With the inventories of a number of agricultural commodities near historic lows and rising concerns that El Nina will cause crop disruptions later this year, investors have steadily increased their holdings of agricultural ETCs by $504mn in 1H 2009. ETFS Agriculture saw the strongest inflows in the sector, with inflows up $384mn, behind only gold, oil and natural gas in terms of inflows.
Nicholas Brooks, Head of Research and Investment Strategy, commenting on the 1H 2009 performance numbers said:

“Commodities were the best performing major asset class in the first half of 2009, outperforming developed market equities, bonds and real estate. Commodities have also been the best performing asset class over the past ten years. Remarkably, this performance has been achieved with lower volatility than most developed market equity benchmarks. 1H 2009 started off slowly for most commodities, with gold standing out as the strongest performer in the first part of the year as investors remained concerned about the state of the global financial system and economy. However, as global economic lead indicators began to pick up and credit markets began to function again, cyclically-oriented commodities such as industrial metals and energy began to perform extremely strongly. The top 5 best performing non-leveraged exchange traded commodities (ETCs) were ETFS Copper (up 58.2%), ETFS Gasoline (57.2%), ETFS Physical Palladium (35.3%) and ETFS Brent (33.1%). Total ETC flows are now 34% above the previous all-time high of July 2008, with gold, oil, agriculture and natural gas seeing the largest inflows. More recently we have seen a switch away from ETCs tracking shorter-dated oil futures returns into longer-dated oil ETCs such as ETFS Brent 1yr, into ETFS Short Crude Oil, into ETFS Natural Gas (a price laggard this year) and into ETFS Agriculture, indicating that ETC investors are starting to take a more defensive stance towards the sector.”
¹ Proxied by the UK EPRA Real Estate Index.
² Proxied by the US Tracker 1-10Yrs Bond Index.
³ Calculated using the annual volatility of daily returns from 30th June 1999 to the 30th June 2009.

Source:ETFWorld.co.uk – ETFSecurities