By ANNA PRIOR
It's not surprising that the financial industry would create exchange-traded funds to let you get in on the gold rush or invest in oil. But uranium? Believe it or not, you can buy that, too and without ever setting foot on the black market. Over the past several months, a slew of ETFs have debuted allowing ordinary investors to load up on commodities without having to deal with any delivery contracts themselves. The new additions are part of a commodity-ETF market that has boomed to more than $100 billion, nearly triple the size it was three years ago. But according to experts, there's a catch: These new products have the same shortcomings as some older commodity ETFs.
Those problems include, most pressingly, that commodity ETFs don't always follow commodity prices. If the ETFs don't actually hold the commodities they're supposed to track, "you're going to be hard-pressed" to get them to mirror the spot prices, says Abraham Bailin, who studies this new breed of financial products for Morningstar. Indeed, instead of physically holding any commodity, many of these new ETFs actually trade the futures. But the prices of such contracts don't move at the same rate as that of the actual commodity. Take the corn ETF, which is up 84 percent since its launch. Sounds great, right? Well, turns out, the spot price of corn is up more than 120 percent. Sal Gilbertie, president of Teucrium Trading, which started a corn ETF last June, is fine with that: "We're not designed to track the spot price," he says. Other commodity ETFs invest not in the metal or grain itself but in firms that use it. The price of uranium fell 6 percent over a three-week period in March, for example, but the Global X Uranium ETF was down roughly double over the same period. "It's a higher-risk, higher-reward type of proposition," responds Global X funds CEO Bruno del Ama.
Such pricing inconsistencies don't necessarily make these ETFs a bad crop. But investors should know the risks in advance, experts say. Sure, a fund that physically owns the commodity is likely to track the spot price more closely. But then, to be fair, that can create problems of its own. Storing billions of dollars' worth of corn requires one heck of a lot of grain silos and Teucrium's Gilbertie says that's one commodities challenge he's happy to leave to others.