ETF: Commodity ETFs in your portfolio

In ETF Blog, Latestby Kristia van Heerden

commodity ETFsCommodities tend to give investors a sense of security. Gold is especially popular during political and economical turmoil. The presence of a tangible asset at the other end of the transaction is comforting to those who are at all times geared for the apocalypse.

While it’s very possible to invest in physical commodities, storing large supplies of rhodium in your home is probably a security risk. In the South African market, there are seven ETFs that are backed by physical commodities. While it might be difficult to gain access to your platinum supply when the zombies* rise, these ETFs offer opportunities to make money on currency and commodity price movements.

Below is a list of all the commodity ETFs available to South African investors, as well as the cost (TER) and a downloadable fact sheet on each. It’s important to remember that these ETFs are backed by physical assets. For every share you buy, a fractional amount (usually 1/100th of a troy ounce) of the physical asset is bought and stored. The cost of that transaction is priced in. Remember you can’t buy commodity ETFs in your tax free investment account.

ETFs aren’t the only way to gain exposure to commodities. There are three commodity exchange traded notes (ETNs) available too. Unlike ETFs, ETNs give you exposure to the price movement of the commodity, but not the physical asset. You can also invest in ETFs that invest in resource companies, like the Satrix RESI and the NewFunds S&P GIVI SA Resources ETF from Absa.

Weekly expert: Warren Ingram

Whether you should have commodity ETFs in your portfolio is debatable. This week we asked Galileo Capital’s Warren Ingram to share his thoughts on commodity exposure in a balanced portfolio.

What role should commodities play in a balanced ETF portfolio?

They should play a limited role in any balanced portfolio. I would not allow commodities to be worth more than 10% of a balanced portfolio. Ideally commodities are good for hedging investors against serious risks in financial markets e.g. stock market collapse and as a hedge against spiralling inflation.

What are the risk factors associated with commodity ETFs?

I am wary of commodities because the prices are very cyclical and notoriously difficult to anticipate. When commodities are not performing well, there is no income from the asset, only costs. You could find long periods where your commodity investment only loses value or drifts sideways.

Should investors pick a single commodity ETF or combine different commodities to make up their commodity exposure in a portfolio?

I always prefer diversification with investments and commodities are no different. A basket is lower risk than a single commodity.

ETF TER Fact sheet
Absa NewGold ETF 0.40% Absa NewGold Fact Sheet
Absa NewPalladium ETF 0.40% Absa NewPalladium Fact Sheet
Absa NewPlat ETF 0.40% Absa NewPlat Fact Sheet
Standard Bank AfricaPalladium ETF 0.35% Africa Palladium Fact Sheet
Standard Bank AfricaPlatinum ETF 0.3% Africa Platinum Fact Sheet
Standard Bank AfricaGold ETF 0.25% Africa Gold Fact Sheet
Standard Bank AfricaRhodium ETF 0.75% Africa Rhodium Fact Sheet

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