When Graham Tuckwell developed the world's first gold
exchange-traded fund (ETF) in 2003, its prospects seemed grim.
Commodities were out of style, gold was trading below $350 an
ounce and the concept of gaining direct exposure to metals
without trading derivatives or taking physical delivery was, at
best, inventive-and, at worst, downright unnerving.
What a difference a few years can make.
Once the stuff of institutional investors and high-end
financiers, commodity ETFs are today popping up in portfolios
of every size, and their popularity continues to climb.
According to data from the National Stock Exchange, commodity
ETFs and ETNs (exchange-traded notes)-a structurally different
but similar product to an ETF-held $70.39 billion in assets at
the end of January, up more than 70 percent from $41.31 billion
a year earlier.
"To be honest, we had no idea it was
going to take off in the way it did," Tuckwell, chairman of
Europe-based ETF Securities Ltd., said. "We had a concept of
what might happen and we had some argument as to why
people should buy it, but had I known that just the
gold market itself was going to be, what, $50 billion? Even the
World Gold Council"-which Tuckwell said endorsed the product at
the time of launch-"they weren't 100-percent sure how much it
was going to take off and in what period of time."
Tuckwell's company alone has launched
hundreds of other commodity ETFs in markets across the globe,
including a full spread of precious and industrial metals,
agricultural and energy products in the United Kingdom, and
other companies have quickly followed suit.
"In many ways, (ETFs) have been
defining Europe in terms of financial markets," he said.
Of course, ETF Securities isn't the
only one riding the wave of physically backed commodity ETFs.
Although precious metal ETFs continue to dominate the market,
the buzz around industrial metal products is getting louder,
with Credit Suisse Group and Glencore International AG moving
forward in discussions about a physically backed aluminum ETF
and Swiss company GAM Holding Ltd. reportedly planning to
launch its own copper-, zinc-, aluminum- and nickel-backed
products before the end of the year.
In the past few quarters, ETF
Securities also has expanded stateside, launching its first
U.S.-listed product, ETFS Silver Trust, in July 2009 and a
parallel gold product, ETFS Physical Swiss Gold Shares, just a
few weeks later. In early January, the company completed its
physically backed precious metals line with the launch of its
platinum and palladium ETFs, and is working to ready the next
stage of the U.S. offering to be presented before the U.S.
Securities and Exchange Commission (SEC).
Approval from the SEC aside, expansion
into the U.S. market shouldn't be too difficult, Tuckwell said,
due to the fee-based structure of the U.S. investment system.
According to Tuckwell, U.S. financial advisors are not allowed
to earn special commissions for recommending specific products,
unlike advisors in other parts of the world who he says are
pushing their clients away from ETFs and into higher-commission
products to earn a quick buck.
"I think what we're finding is the U.S.
market has been following ETFs generally for a number of years;
in other parts of the world-Australia, Hong Kong in
particular-we're finding that where financial advisors are
being paid up-front commissions and trial commissions for
recommending particular products, they're putting their clients
into products that are not as efficient and not as
cost-effective as ETFs. They're ripping their clients off,
In the U.S., interest in ETFs continues
to climb. "I think it's on a forward trajectory," Tuckwell
said, claiming that he first called a 15- to 20-year
commodities cycle in 2002, attributing the future run-up to
ongoing inflation and improved commodity fundamentals.
"Two things are happening. Firstly, on
the inflation front the governments have printed a huge amount
of money and in my view they're not going to sterilize it by
buying it back, so what they're going to do is just bring on
inflation," he said. "Secondly, the development of mines and
other resources that are required to produce commodities is
(meeting) increasing environmental resistance. Fifteen years
ago you could find a deposit and build a mine on it in three,
four years; now it takes 15 or 20 years."
As such, interest in
commodity ETFs can only soar, Tuckwell said, making them the
investment vehicle of the future-and positioning ETF Securities
to reap the benefits. "I think if you compare mutual funds to
ETFs, clearly ETFs are better. If you actually sit down with
the next generation of investors, they'll say, 'Why would I
ever buy mutual funds? That's a 1960s investment.'"