Besides regular equities, mutual funds, and currencies, investors are leveraging a different class of investments called Exchange Traded Funds, or the "third-asset class." ETF providers are trying to innovate the commodity space across base and precious metals, agriculture-backed ETFs, among others.
Buoyed by increasing investor demand and attractive returns ETFs provide, the United States Commodity Funds, in a relationship with SummerHaven Investment Management, has filed with the securities regulators three new contango-controlling ETFs focusing on copper , agriculture, and metals.
The new offerings will be based on the United States Commodity Index Fund . During the past 12 months, the SPDR Metals Mining ETF has gained 25.8 per cent.
Fund managers have strong reasons to choose the above ETFs. With regard to copper, the red metal's prices have escalated 20.6 per cent during the past one year and are likely to zoom on the growing demand. Secondly, the agriculture sector benefits from the purchasing power of emerging economies, in view of their burgeoning population. Finally, metals are pivotal to economic growth, as industrial development generates impressive returns for investors.
United States Copper Fund
United States Copper Fund will hold futures contracts in copper and will use a unique weighting and roll strategy depending on whether or the copper market is in contango or backwardation. Contango occurs when futures contracts nearing expiration are cheaper than longer-dated contracts, while backwardation is the reverse. The fund will be based on the SummerHaven Copper Index.
Copper, one of the most important base metals, is used in pipes, tubing, wires, and other industrial applications. The metal's prices mainly correlate with the construction and industrial activity in any economy. Industry analysts predict that for the first time in four years demand for copper will outpace supply in 2011, pushing the prices up further.
A recent GFMS study said copper prices on the London Metal Exchange (LME) are likely to touch $11,000 per metric tonne (U.S.) by 2013, a 33 per cent upside from current prices, mainly due to the shortages that are estimated.
A major portion of the demand is expected from emerging economies with China's demand rising 6 per cent annually, representing almost two-thirds of global growth from 2010 to 2013. Further, refined copper production is likely to expand by an average 3.4 per cent a year from 2011 to 2013.
Moreover, analysis shows that in 2011, the Middle East will remain an important market for raw materials, supported by oil prices and vast investments in infrastructure. For instance, Saudi Arabia is likely to award construction contracts worth $86 billion in 2011.
United States Agriculture Index Fund
United States Agriculture Index Fund is likely to track the SummerHaven Dynamic Agriculture Index, which provides exposure to 14 different agricultural commodities including soybean, corn, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, coffee, cocoa, cotton, live cattle, feeder cattle, and lean hogs. It would be buying futures on the ICE, CBOT, CME, Kansas City Board of Trade (KCBT) and other foreign exchanges. Each of these commodities is assigned a base weight, based on market liquidity and a commodity's economic strength.
The agriculture industry is closely linked to the growing appetite of emerging countries and the U.S. biofuels industry. The U.S. Agriculture Department (USDA) report said that in November, although the U.S. has experienced lower crop yields, global yields have outperformed the USDA estimates.
The USDA recently said net-farm income, considered a ballpark measure of the agriculture sector's profitability, is estimated to surge 31 per cent in 2010 to $81.6 billion, as compared to 2009. Further, the USDA estimates that the industry is on a rapid expansion spree, driven by the soaring prices of livestock and major crops such as cotton, corn, and wheat. Moreover, farmers' revenue is up almost 10.4 per cent this year with production expenses increasing a meager 2 per cent.
Despite soaring grain prices and rising profitability, U.S. farmers' are likely to receive a $12.4 billion aid from the government, equivalent to the federal aid received in 2009.
United States Metal Index Fund
The United States Metal Index Fund will include both base and precious metals holdings, tracking 10 metals, including aluminum, copper, zinc, nickel, tin, lead, platinum, palladium, silver, and gold. Like the agriculture index, each metal will be allocated a base weight, based on market liquidity and overall economic importance of the metal. The fund will be based on SummerHaven Dynamic Metals Index with investments in futures contracts on the NYMEX, LME, COMEX, or on other foreign exchanges.
Investors are likely to favor the two precious metals gold and silver, as developed nations like the U.S. continue to implement loose monetary policies, which would finally lead to the devaluation of the dollar. The other two precious metals platinum and palladium are seen having robust demand growth, as they find application in auto catalysts, for emission control in automobiles and heavy-duty diesel driven trucks.
Recently, Credit Agricole said that amid the Ireland debt crisis and China's economic issues, the overall perception of the selloff was overdone and was in reaction to macro fears, which led to a healthy correction, thereby removing the extra froth from the markets. Subsequently, it raised its three-month targets for base metals to $9,000 per metric tonne for copper, $2,700 for aluminum, $24,000 for nickel, $2,400 for zinc, $2,600 for lead, and $27,000 for tin.
Moreover, Moody's, in its latest report, assigned a stable outlook for the global base metals industry indicating that industry fundamentals would remain supportive of the price levels. The rating agency believes that rapid industrialization in emerging will determine demand. Investors should stay overweight in silver, palladium, and gold over a one-year period, said Societe Generale.
As per consultancy firm GFMS, silver prices are likely to hit 30-year highs and trade above $30 per ounce in 2011, owing to a recovery in industrial demand. Moreover, for 2010, GFMS predicts a 5 per cent increase in silver supply, halting the streak of flat production rates for three years. Referring to the 24 per cent surge in gold prices during 2010, George Soros believes that investments in gold still indicate future gains.
As per the World Gold Council, global gold demand surged 43 per cent during the third quarter compared to the year-ago period, with major demand arising from the world's two largest markets, India and China. Industry analysts say gold prices will continue to spike in the fourth quarter and reach record levels during the first quarter of 2011. A recent WGC report adds that the backdrop of low interest rates, currency instability, sovereign debt, and inflation fears is positive for gold prices.
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