Commodity and currency-based exchange-traded funds are gaining popularity as investors disappointed with poor returns on traditional investments like stocks and bonds look to diversify their holdings.
According to a report from the research firm Aite Group, assets under management in commodity ETFs hit $118 billion at the end of October, up dramatically from slightly more than $1 billion in 2004. Currency-based ETFs, meanwhile, grew eightfold, from less than $1 billion at the end of 2006 to just under $8 billion at the end of October. Together, they represent about 12% of the overall ETF assets under management, according to Aite.
Commodity and currency ETFs are compelling, given the stock market's poor performance over the last 10 years and today's near-zero interest-rate environment, said Howard Tai, senior analyst at Aite and author of the report.
According to the report, commodity-based exchange-traded products, particularly those that invest in gold, are one of the fastest-growing alternative sectors of the exchange-traded marketplace, growing faster than traditional equity and fixed-income exchange-traded products.
From the end of October 2009 through the end of October 2011, assets under management in commodity exchange-traded products grew 40% and 20%, respectively, while growth in equity ETFs slowed.
Currency ETFs have also had a strong growth trajectory, triggered in part by the global financial crisis in 2008, when investors around the world learned the importance of "asset diversification away from traditional, equity-centric investments," Aite says in the report. "Currency investing and trading is one way in which uncorrelated returns to stock market's returns can be achieved."
In addition to the asset diversification they provide, commodity and currency ETFs have cost advantages. Management fees for commodity exchange-traded products range from 25 to 150 basis points of assets under management, with the majority of funds charging 75 basis points. The management fees of managed futures can easily be double or triple these amounts, according to Aite.
Not all is rosy, however. High fluctuations in commodity prices and currency exchange rates, along with the rollout of Dodd-Frank rulings and the streamlining of regulatory oversight issues, will pose challenges.