Commodity-based exchange-traded products were hardly singed by the spark that in recent years lit a fire under assets in U.S.-listed equity and fixed-income exchange-traded funds. But recent product launches and consolidation among commodity ETP issuers has some in the market looking for a flare-up.
Launched more than a decade after the first U.S. equity ETF, commodity-based ETPs hit the U.S. in November 2004 with the now $34.1 billion SPDR Gold Trust, sponsored by World Gold Trust Services. It goes by the ticker GLD.
The entire U.S. commodity ETP complex holds $71 billion in assets across 135 products, including those with exposure to precious metals, and industrial metals, energy and agricultural commodity futures. By comparison, the U.S. equity ETP market holds $2.8 trillion in assets across 1,443 products, according to research from XTF, a unit of the London Stock Exchange Group.
Commodity-based products largely have been insulated from the "Vanguard effect," whereby an asset manager — often Vanguard Group Inc. — enters a financial product market at a significantly lower price and ends up bringing down expenses across the board. For example, BlackRock's iShares Gold Trust, despite launching three months after GLD and priced at 0.25% or 15 basis points less than GLD for almost eight years, is only very slowly chipping away at GLD's lead in physical gold holdings.
Consolidation looks to also affect product strategy.
In the fall of 2014, Invesco took over management of the commodity ETPs under its PowerShares brand that previously were managed by Deutsche Asset and Wealth Management. And in the first quarter of 2018, the U.S. commodity offerings of ETF Securities were acquired by Aberdeen Standard Investments.
"Commodities have just emerged from a prolonged bear market," said William Rhind, founder and CEO of GraniteShares Inc. "In a bear market there was little demand for commodity funds and therefore no innovation on the product development side."
Attempting to shift that narrative, GraniteShares launched a gold product, BAR, in August 2017 at a 0.2% expense ratio. The product experienced marginal trading and flows until a $130 million inflow in late May.
But competition is coming. World Gold Trust recently revealed a 0.18% expense ratio for the yet-to-list SPDR Gold MiniShares, compared to 0.4% for GLD.
The New Jersey Pension Fund held roughly $76 million in GLD and $75 million in iShares Gold Trust through March 31 but officials declined to comment on its holdings. While a handful of other asset owners report commodity ETP holdings — Alaska Permanent Fund Corp., Texas Teacher Retirement System, Adventist Health System, among others — direct holding by tax-advantaged institutional investors is limited.
Beyond gold, GraniteShares also brought competitive pricing in May 2017 to funds looking to outperform Bloomberg and Goldman Sachs commodity indexes at fees of 25 and 35 basis points, respectively. By utilizing a Cayman Islands subsidiary for futures exposure, the funds do not require K-1 tax filings.
ETF Securities itself launched three "no K-1" commodity index ETFs in March 2017. The ETFS Bloomberg All Commodity K-1 Free ETF manages $191 million at a 0.29% expense ratio. And at a 0.6% expense ratio with $1.7 billion in assets under management, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 has been trading since November 2014.
Prior to the introduction of "no K-1" funds, commodity ETP investors had to opt for exchange-traded notes or partnerships and commodity pools that introduce counterparty risk, in the case of notes, or a variety of potential tax consequences based on K-1 distribution. According to XTF, of the 134 U.S.-listed commodity ETPs, 71 are ETNs and 40 use leverage or inverse leverage.
Unlike most equity and fixed-income exchange-traded funds, where holdings and tracking are fairly clear and mostly understood by retail and institutional investors alike, the commodity complex remains held back by differing views on utility and complexity.
"Forward rolls on futures include carry and holding costs. These contracts work for short-term situations but are more difficult to justify for buy-and-hold strategies," said M. Bagley Reid, founding member and managing director at Blue Edge Capital LLC in Richmond, Va., which manages $275 million for individual investors, 401(k) and pension plans, as well as foundations and endowments.
Mr. Rhind, who has more than 15 years of experience in the commodity ETP and ETF complex, first at iShares, then at ETF Securities and the World Gold Council before founding GraniteShares, said volatility in equities, rate moves in the U.S., as well as the rising price of oil, have combined to create more of a buzz around commodity ETPs.n
