ETF Insight: Commodity ETPs, the biggest surprise of 2019

George Geddes


The performance of commodity ETPs has been one of the "biggest surprises" of 2019, according to industry commentators, as the asset class continues to attract inflows, but what has been causing this demand?

Investors remained bearish while the trade war between the US and China built-up to its initial phase coupled with stop-start negotiations between the UK and the European Union to finalise Brexit. And with little progress actually being made by either event, the S&P 500 and FTSE 100, the US and UK's largest companies, have still had successfully strong performances.

But investors have inevitably hedged their bets throughout, most notably with ETPs offering exposure to the yellow metal, gold.

In August, the price of gold was consistently climbing, hovering around $1,500/oz and WisdomTree forecasts the price to continue climbing to $1,550/oz by Q2 2020. WisdomTree’s Nitesh Shah, director and commodity strategist, spoke with ETF Stream and said gold’s price rally has been “the biggest surprise” of 2019.

“Gold has been the standout this year with the data up to November showing inflows of nearly $1.4trn into gold ETPs which are probably the strongest inflows we’ve seen in seven or eight years, if not, in the history of ETPs,” Shah continued.

Silver and platinum have been following closely to gold’s performance and flows but on a smaller scale.

Shah said: “We saw inflows into silver and platinum ETPs which were falling on the coattails of the demand for gold but on a much smaller scale around the $250m range.”

By November’s end, the WisdomTree Physical Gold ETP (PHAU) had a year-to-date return of 13.7% but this was by no means the best performing commodity for the period.

By a significant margin, the Xtrackers Rhodium ETP (XRH0) has not just been the top-performing commodity ETP this year, it's been the best performing product across all asset classes. Over the same period, XRH0 had a YTD performance of 130.1%, but what is it?

It is an extremely rare noble metal and part of the platinum group. It is predominantly used within automobiles production, alloyed with platinum or palladium to create corrosive-resistive coatings. It’s surprisingly unheard of, with XRH0 only having $75m assets under management despite launching back in 2011.

When questioned for more information on the product and reasoning for its performance, DWS was unable to comment due to it being so niche. A spokesperson for the firm said, “it’s such a small product that doesn’t trade much, it sits in the product line up but none of our sales specialists are experts on it, so no one has expertise in the underlying market and there’s not been a rush of flows into it.”

According to Shah, Rhodium is a rarer metal than the other platinum group metals which means there is slightly less liquidity in the underlying.

"With there being such a sharp rally in the palladium prices, there has been desire by automobile manufacturers to diversify away from palladium and increase platinum loadings. Therefore, combining more with rhodium, there was a demand boost from the industrial side, said Shah.

"As rhodium is rarer than palladium, the rally in price is even more extreme and the availability for the industrial side is even tighter."

WisdomTree does offer a palladium ETP (PHPD) which has been the firm’s top performing product this year returning 45% as at the end of November.

There has been an equal amount of demand for the metal but due to its underlying market being more liquid, its performance hasn’t been anywhere near the same level as rhodium.

Why are we bothering with commodities?

Not all commodities have been relishing in 2019. Oil and nickel ETPs have had ups and downs throughout the year. Oil products have benefited from the OPEC’s decision to cut back on production and has resulted in the price of the commodity bouncing back from slumps earlier this year, but the WisdomTree WTI Crude Oil is trading at a loss from its position back in May.

Nickel ETPs did see their net asset values climb to a high of 50% but these gains have been lost for the most part.

Moving into 2020, a clearer picture seems to be developing from a macro perspective. The US and China have agreed on phase one of a trade deal, removing certain tariffs on imported goods while in the UK, Boris Johnson remains the country’s prime minister and will be hoping to push through his Brexit deal in January 2020.

Danny Dolan, managing director at China Post Global, forecasts these price rallies, in particular gold’s, will likely continue.

Dolan said: “To deal with the short term of Brexit, there will likely be more rate cuts than rate hikes in addition to investors being starved of yield and a growing risk of a global recession, all climbs look set to continue.”

ETF Insight is a new series brought to you by ETF Stream. Each week, we shine a light on the key issues from across the European ETF industry, analysing and interpreting the latest trends in the space. For last week’s insight, click here.

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