Commodity ETFs rally as Federal Reserve defers tapering

Sep 19th, 2013 | By | Category: Commodities

Commodity ETFs rallied sharply higher on Wednesday after the US Federal Reserve (Fed) said it would leave its quantitative easing programme unchanged, a policy largely seen as supporting commodity prices.

Commodity ETFs rally as Federal Reserve defers tapering

Commodity ETFs rallied sharply on Wednesday after the US Federal Reserve announced it would leave its quantitative easing stimulus programme unchanged for the time being.

Following comments from Fed Chairman Ben Bernanke in May, investors had priced in some degree of ‘tapering’, the term coined by Bernanke to describe a gradual unwinding of the stimulus programme.

The decision by the Fed not to reduce the amount of bond purchases each month therefore came as a big surprise.

It appears the Fed was concerned by recent fiscal tightening, namely rising Treasury yields, which were largely caused by Bernanke’s comments in May. All the talk of tapering seems to have delayed the real thing.

Not surprisingly, most risk assets reacted positively to the announcement, but gold and oil, in particular, experienced a strong bounce, with the SPDR Gold Shares (GLD), the world’s largest gold ETF, adding 4.5% and the United States Oil Fund (USO), the word’s largest oil ETF, adding 2.4%.

According to Ole Hansen, Head of Commodity Strategy at Saxo Bank: “Crude oil rallied yesterday before and after the surprise taper delay announcement from the US FOMC meeting. The continued injection of liquidity suppressed the US dollar thereby lifting the general investment outlook for commodities”.

But while commodity ETFs have enjoyed a spike because of the apparent deferral of tapering, Edith Southammakosane, a senior analyst at ETF Securities, a leading provider of exchange-traded commodities (ETCs), reckons commodity investors have nothing to fear from tapering.

According to Southammakosane: “Although the financial market has positively welcomed yesterday FOMC’s outcome, the decision to taper is only postponed for later this year depending on the strength of activity. However, we believe that tapering itself should have limited impact on commodity prices as the Fed’s bond-buying stimulus will remain at a historically high level. Indeed, the tapering of bond purchases is in response to the on-going recovery of the US economy, and alongside robust Chinese demand and an improvement in European conditions, should continue to support demand for cyclical commodities such as industrial metals or energy.”

Investors looking for a broad commodity ETF have literally dozens of products to choose from. Among the most popular, in terms of European listed funds, include the db X-trackers DBLCI-OY Balanced UCITS ETF (XDBG), the iShares Dow Jones-UBS Commodity Swap (DE) (EXXY), the ETFS All Commodities DJ-UBSCI (AGCP), the LGIM Commodity Composite Source UCITS ETF (LGCU) and the RBS Market Access Rogers International Commodity Index ETF (RICI).

For a smart beta play on commodities, investors could consider the recently launched Ossiam Risk Weighted Enhanced Commodity ex. Grains TR UCITS ETF (CRWU) from smart beta specialists Ossiam.

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