Last month I mentioned the Agricultural Exchange Traded Fund and I thought I would return to ETFs this month.
I remember when I first came across ETFs or ishares back in the early part of this century you could count the number available (at least to retail investors) on your fingers and toes. Now the range is staggering. There can't be many sectors, regions or asset classes that you can no longer get exposure to via an ETF.
Of course those of you in the know will be aware that the Agricultural ETF is not in fact an ETF, but an ETC - an Exchange Traded Commodities Fund. The difference is that an ETC uses a secure, undated, zero coupon note structure whereas ETFs typically have a fund structure.
ETCs can be bought and sold like ETFs and both are open ended.
ETCs allow investors to gain exposure to the commodities market without taking delivery of a barrel of oil or a bushel of wheat.
At last count, I could find 31 non leveraged, non future ETCs (that is to say simple "trackers") available to UK investors ranging from those holding a basket of commodities like the Agricultural ETC already mentioned to Gold, Lean Hogs and Cotton. I wouldn't be surprised if there are many more.
Given the current climate of increasing cost of raw materials I would not be surprised if investors will be considering an ETC or two in their SIPP portfolio.
- I would like to highlight a couple that might be of interest: ETFS livestock sector - this is currently investing in two securities, namely live cattle and lean hogs, having three it can invest in (the other is Livestock).
This is one of only a hand full of ETCs that have actually fallen over the last year, and quite dramatically at that. It is down 21% for the year to 30th April 2008, but I can't see that downward trend continuing.
- ETFS grains - this again has a basket of three commodities: soy beans, corn and wheat. As you might expect this has performed well over the last 12 months being up 58% over the same period.
The changing use of agricultural land to bio fuels over the last few years has been a factor contributing to this rise, and even if there will be a move back the other way this can not happen over night.
Poor harvests around the world have also served to drive grain prices upwards.
- ETFS crude oil - one of the star performers of the last 12 months - up 76% for the year to 30 April 2008.
Whether you choose to go for this one will depend whether or not you are in the $200 a barrel camp. Clearly if you are, the current price of about $120 will make this an attractive option.
- ETFS all commodities - this is the one for those who know they want exposure to commodities as an asset class as a diversifier in their portfolio, but do not want to take the risk of a single commodity or a small basket.
This, as the name suggests, has exposure to all commodity sectors with energy and agriculture being the largest holdings.
The performance has been the equivalent of 16.7% per annum over five years.
I would suggest this is the one for all but the most adventurous of investors.
If you are feeling extremely adventurous then you can always consider forward, short or leveraged ETCs - I personally will be giving these a wide berth.
ETFs have become extremely popular for tracking equity markets, and I would suggest that ETCs will become equally as popular as a way of accessing a largely non-correlated asset class that will reduce the risk of any SIPP portfolio.
Remember a lot of those very popular and, I have to say extremely good, funds that have names that suggest exposure to commodities actually invest in the companies involved in the sector, not the commodity itself. There is certainly a place for both.
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