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Why Are Commodity ETFs Closing?

Written by Rebecca Hampson

 –  March 22, 2013

Banks and fund managers in France have been closing some of their commodity exchange-traded funds in response to a campaign by Oxfam saying that they are profiting from hunger.

In its campaign, “Banks: Profiting from Hunger”, which ran in France last month, Oxfam argued that French banks and fund managers were speculating on food.

Negative publicity over commodity speculation has prompted Amundi, Europe’s second-largest asset manager, to announce the closure of three of its commodities ETFs. The three ETFs all include agriculture and livestock and have $24.7 million in assets between them, according to data from Morningstar.

French bank Crédit Agricole has also shuttered three funds and BNP Paribas closed its EasyETF Ultra-Light Energy fund.  BNP Paribas also shut three ETFs exposed to food-related investments in July last year.

Nizam Hamid, an independent consultant in the ETF and index market, told IndexUniverse.eu: “We have seen a number of commodity ETPs close and this is mainly due to the fact that they have an exposure to agriculture. Some more activist groups  like Oxfam have suggested that trading commodities can cause price distortions and they then put pressure on the banks and fund managers.”

According to Hector McNeil, co-CEO at Boost ETP, “This is a real concern and it is not a reaction to assets under management falling. In the past there have been significant assets under management in agriculture and livestock ETPs.”

“As part of our analysis for potentially launching an agriculture product we have to consider the ethical issues and we are currently doing that,” McNeil said.

But McNeil also offers a counter-argument to those alleging that financial institutions create unnecessary food price rises.

“Investors’ money provides valuable liquidity and demand for producers,” McNeil told IndexUniverse.eu.

However, it is unclear how other commodity ETF issuers are going to react and also whether there is enough incentive for regulators to put pressure on commodity ETFs.

One market participant who offers commodity funds said: “We have no plans to close any of our commodity funds, but this is a political topic that has received much attention.”

They added: “If you look at the statistics, only 0.5% of commodity assets come from agriculture compared to the rest of the ETF space.”

According to independent consultancy firm, ETFGI, the 111 agriculture ETFs and ETPs around the globe have total assets of $3 billion, which is only 4.4 percent of the total $68 billion invested worldwide in commodity trackers.. The 16 livestock ETPs have only $71 million in assets, 0.1 percent the total.

“The question now is whether other banks and fund managers will feel pressure to close their commodity ETFs and whether there will be a more general pressure to rethink this type of exposure within UCITS funds,” said Hamid.

In response to the debate over the ethics of offering commodity trackers, one provider, ETF Securities, launched the first exchange-traded commodity which excludes agriculture and livestock in November last year.  It has since attracted assets under management of $34 million.

Isabell Moessler, co-head of European sales at ETF Securities, said at the time: “The ETC is a solution for investors who want to avoid these two [livestock and agriculture] sectors. Previously they would have invested in the ETFS All Commodities DJ-UBSCI and then shorted the agriculture and livestock.”

“We have launched this new product on the back of client feedback and demand, driven by the ethical debate surrounding investing in food, which includes agriculture and livestock,” Moessler said.

However, the debate over speculation in soft commodities goes further than just ETPs. Index providers could also have to make changes should regulatory and political pressures become hard-lined.

Hamid said: “Given the regulatory changes and pressures we are now seeing, questions among index providers will also be asked. Whether commodity index providers will have to create different indices for US and European users based on different political and regulatory attitudes is unclear, but it could create a position, certainly in Europe, where we see a period of fund closures on the back of regulatory and political pressures.”

Oxfam has been lobbying for this at the European Union, as well as the US and G20. The European Parliament has already voted in favour of introducing mandatory limits on speculation on commodity derivatives and Oxfam is calling on the European Council to follow suit.


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