The Intricacies of Commodity ETFs

The collapse of oil prices in mid-April garnered quite a bit of media attention given that oil traded (and settled) in negative territory on April 20th. One of the main catalysts for this historic day was the fact that storage in Cushing, Oklahoma – where physical delivery of oil takes place – was scarce. To make a long story short, those market participants who were long oil without anywhere to store it had to face the harsh reality of paying others to take that exposure off their hands. As a result of oil prices at the front end of the curve trading in negative territory, there was an influx of speculative inflows into ETFs that are designed to provide exposure to oil from the retail investor community, hoping to profit off a subsequent rebound. Movement Capital released a blog post this week on some of the intricacies of commodity ETFs that investors should be aware of. The cost of rolling commodity futures, along with potential market impact costs that arise from any frontrunning due to the transparent nature of the ETF vehicle, can make it so that the underlying commodity return is vastly different from the long-term ETF return. Like with any investment product, investors need to do their due diligence on the investment vehicle, but it is worth mentioning that the structure of commodity ETFs make it challenging for long-term investors to use efficiently.