LONDON: 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, effectively."
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.'"