DEMAND FOR COMMODITIES: ETFs, ETNs & TRUSTS

Traders are always in search of new opportunities outside the normal equity offerings, but there have always been hindrances to their involvement in the commodity market.   Not clearly understanding the market and no proper access, limit them.  There are also huge agency costs involved in the commodity business.  Nevertheless, these hindrances have now begun to disappear and commodity trading is becoming conventional investments.

The strong presence of financial media outlets, brokerages and increasing concerns about present events are adding to this effect. These financial media outlets provide information for retail investors.  These financial news channels develop contents that attract a broad range of viewers. This includes beginning traders and sophisticated investors.  These media outlets cover exchange activity, economic data and spot prices.

Apart from reporting financial news, media outlets offer constant coverage of geopolitical issues and natural disasters around the world.   These factors together with perceptions of commodity consumption and their volatile prices in rising economies engage the investor. Many brokerage firms undertake research that helps promote commodities.   The coverage could be equity based or in several instruments that expose commodity prices with traders being the target.

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Sell-side research still has a strong influence even with the conflicts of interest emphasized after the internet stock craze.   This is due to the fact that the conflicts are not very visible or maybe doesn’t even exist in the commodity market. When brokers compete among each other, it promotes the investment commodity. Competition here will be on their ability to provide traders with access to new investment prospects and instruments that enable them to make informed decisions.  Investing in commodities is a new cutting edge for traders as it enables them to grow outside their normal stock and bond offers and complements their investment with an asset class. Because they are becoming tired of stock performance, they can expect a very open audience in commodity trading.

ETFs

Until now, there was only one way for individuals and institutional investors to have a quick access to the commodity market.  It was by the purchase of stocks that centred on particular commodity sectors. That method is more efficient with the introduction of ETFs that keeps hold of stock baskets in particular sectors.  ETFs have become popular as a tradable and investable instrument due to lower brokerage commissions, sufficient liquidity and all the proficiencies of products traded in electronic means.  Even then, these funds are not perfect commodity proxies due to the corporate stock risk that comes along with them. The firms in a fund can even be partaking in a hedging activity that diminishes the relationship of produced commodities and stock price returns.  This has cleared the way for another breed of trade exchange instrument that tries to securitize price of commodities.  This is made available via normal stock brokerage accounts.

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These shares are traded on the New York Exchange under the GLD ticker symbol. In the course of the past year, Barclays, Deutsche Bank and others have all started to bring out products in the energy and metal sector.  There are also agricultural products like wheat and corn that is obtainable for trade as stocks in the normal brokerage accounts.

At present, there are up to 130 ETFs, ETNs and trusts that track the performance of commodity price.  They do it through the holding of stocks that produce the commodities, the physical ones, and futures contracts.  Even till mid-year, the asset has grown at sharp spike highlighting investor interest in the asset classes as well receptive of equitable new instruments like the ETNs.

Sourced from: fund sponsor's sites as of 31 October 2008 or later

Securitized coverage to commodity prices is not exclusive to the United States.   There is also the London Stock Exchange with more than 120 Exchange Traded Commodities listed in it. The Deutsche Börse also lists more than 110 of such products.  Most major stock exchange now has some kind of open-ended fund-like instrument listed.

Adding to the many trusts and funds open to investors, the U.S. options exchanges widen its menu by providing cash-settled options on indexes that centre on particular commodity sectors. Investors get the extra flexibility to perform difficult spreads in a fast and cheap way.  It doesn’t matter if it is the International Securities Exchange's ISE-Revere Natural Gas Index (FUM) or the Philadelphia Stock Exchange's PHLX Oil Services Index (OSX).

Even though options can be found in some of the trust and commodity pool aforementioned the cash-settled options on indexes themselves provide extra flexibility.  This enables investors to fit their exposure to price movements of commodities. Let’s say an investor employs a strategy that entails selling in-the-money options. He will not have his position changed after it has been assigned.  Instead, the European-style exercise of the index options will see that the position remains unchanged.