There’s been a spate of commotion this week in the world of commodity ETFs, or ETPs (exchange traded products) as they are fast becoming known.
It comes in the shape of a CFTC ruling that resulted in two Deutsche Bank PowerShares commodity funds, with a total of $5.8bn of funds under management, no longer being eligible for position-limit exemptions in wheat and corn. While this sort of action wouldn’t surprise followers of the ETP-effect story in energy markets, the agricultural markets have been caught a touch unaware by the move.
As Dennis Gartman, of the Gartman Letter, noted in his Thursday report most of the market is still trying to ascertain what it means and what the longstanding implications may be:
Finally, regarding grains, the CFTC surprised everyone mid-day in the trading session yesterday by rescinding its previous actions against two of the larger exchange traded funds in the grain business. The long term implications of the decision are not yet known, but the short term implications were that long positions in wheat were liquidated by the funds.
There’s no doubt the grain markets are a completely different animal to the energy markets. The influence of passive exchange-traded funds on contracts, as a result, is much greater due to the market’s much lower liquidity levels.
Now, it could be that the CFTC is trying to act pre-emptively, in so much as after clamping down on the USO in the oil markets, and the UNG fund in the natural gas market, energy arbitrageurs might be tempted to move into the wheat and corn — whose markets are also in contango — to trade the ethanol link.
Given the degree to which commodity ETPs took off in the last few years, any substantial liquidation on the back of enforced regulatory rulings could have a notable impact on prices. Barcap, meanwhile, gives some perspective on that ETP growth in relation to more traditional structured products in its most recent Commodity Investor note on Friday (our emphasis):
The phenomenal growth in exchange traded products (ETPs) this year has also contributed to the loss of market share for structured products in the commodity investment product mix. In the year-todate, while ETP inflows have topped $24bn, structured product issuance stands at a mere $3.6bn. In 2008 as a whole, comparisons were more even with $15.5bn flowing into ETPs and $13.06bn worth of commodity structure issuance, while in 2007, with ETPs still in their infancy, structured products exceeded ETP flows by about $3bn.
The ease and flexibility of investing via ETPs have been a key factor in capturing investor interest, at a time when credit constraints, liquidity and counterparty risk have all been on the agenda.
Related links:
The rise of synthetic ETFs – FT Alphaville
Things looking ugly for the UNG – FT Alphaville
Statistical arbitrage and the big retail ETF con-fusion – FT Alphaville