The ETF Explosion - Hot Commodities

Investors that have been watching the marketplace for ETF’s over the past few years notice one major transformation, which is choice. Increasingly ETF sponsors are rolling out more creative and desirable ETF’s other than just a traditional “index”. Some of the more innovative ETF’s available today include equal weighted funds, funds that automatically rebalance on a schedule, and the increasingly popular commodity funds. It’s no surprise that the demand is so large for commodity funds, given the broad-based surge in commodity prices across the board. Hedge funds, smaller investors, and even middle America is taking notice, and much like the latest real estate bull market, the little guy wants in.

The first commodity ETF to hit the market in late 2004 was the StreetTracks Gold Fund, traded under the ticker symbol (NYSE:GLD). At recent prices this fund holds net assets of over $6.5 billion, and shares trade at roughly 1/10th the spot price of gold. This fund makes it easy for smaller investors to invest, and speculate on price swings without buying physical bullion. Slow to gain widespread attention at first, this is now one of the most actively traded ETF’s on the market.

Recently launched by Barclays Global Investors, is the newest commodity ETF which tracks the spot price of silver. Trading under the ticker symbol (NYSE:SLV), and ten times the spot price of silver, this ETF is sure to gain a lot of attention. Leading up to the launch of the new ETF, spot prices for silver surged, anticipating a large demand in the silver market to back the new ETF shares.

One of the more interesting ETF’s to hit the market recently is the U.S. Oil Fund, sponsored by Victoria Bay Asset Management. The fund trades under the ticker (AMEX:USO), with the objective of mirroring the spot price of West Texas Intermediate light sweet crude. The fund primarily invests in energy futures contracts, options and other instruments to maintain maximum oil exposure. Given the recent surge in oil prices past $70 per barrel, this fund has certainly gained a lot of attention and is a favorite of traders and speculators who want to play oil without going through the futures market.

One of the more overlooked questions that seems to be lingering about these commodity ETF’s, is “Are they good for the market?” Do these new ETF’s really track the supply and demand of these commodities, or are they now introducing a new whirlwind of demand forcing prices ever higher? Since these ETF shares must be backed by assets, when a large amount of money wants to move into the fund, more shares must be created in order to maintain an accurate share price. Once the new shares are created the fund can go into the market and back those shares with physical gold. Given the billions of dollars that have been moving into various commodity based funds, one has to wonder how much of the recent gains are actually caused by the ETF’s themselves.