Industry Updates

What is driving outflows from commodity ETFs?

Strengthening US dollar in play

Tom Eckett

a group of windmills in a field

Concerns over a rising US dollar combined with weakening demand for oil drove big outflows from two commodity ETFs last week.

According to data from Ultumus, the $1.6bn iShares Diversified Commodity Swap UCITS ETF (ICOM) saw $280m outflows in the week to 18 September, the second most across all European-listed ETFs.

Close behind with the third biggest flows last week was the $1.2bn Invesco Bloomberg Commodity UCITS ETF (CMOD) which saw $234m outflows.

The outflows represent a reversal in sentiment as ICOM and CMOD saw combined inflows of $500m in the week to 28 August amid a shift in inflation targets from the Federal Reserve.

The outflows could be a sign investors are predicting a stronger US dollar which saw its biggest gain since June, according to data from Bloomberg. Commodities tend to have an inverse relationship with the US dollar as they are priced in the greenback which becomes more expensive for holders of other currencies.

Have investors lost trust in oil ETFs?

The strengthening US dollar also signifies broad risk-off market sentiment as countries attempt to contend with a second spike of coronavirus.

This risk-off sentiment was further highlighted last week after gold ETPs posted net inflows of around $561m with the $15.1bn iShares Physical Gold ETC (IGLN) seeing inflows of $201m.

After breaking through the $2,000 an ounce barrier and reaching an all-time high in August, the price of gold has fallen back in recent weeks and is now trading at $1,882 an ounce.

Furthermore, Libya’s decision to ramp up oil production next week has put further pressure on oil prices which have fallen in recent weeks due to weakening demand, the rapid spread of coronavirus and higher OPEC and US production.

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Damien Courvalin, head of energy research at Goldman Sachs, added: “The catalyst for the sell-off was the sudden reversal in the summer equity tech rally, which led to an accompanying reduction in retail ETF oil length.

“The nature of this outflow is important as it led both to the underperformance of WTI relative to Brent Crude.”

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