As we put the finishing touches on 2010, the year has shaped up to be one of the most eventful in recent memory for global markets as a number of important events impacted the world economy. Among the events that dominated financial headlines this year were an (ongoing) sovereign debt crisis, the flash crash, a violent volcanic eruption that grounded air traffic for some time in Europe, a major oil spill in the Gulf of Mexico, and another wave of quantitative easing aimed to get the U.S. back on track.
Equities have struggled to fall into a pattern, as the S&P 500 (NYSEARCA:SPY) started the year off around 1,132, and has managed to fight through uncertainty to gain around 100 points on the year. Overall, a 100-point gain seems solid from the outside looking in, but halfway through 2010, the S&P was down 100 points from its opening level, showing how tumultuous this year has been.
Meanwhile, the ETF industry has also had an interesting year, as the product lineup now includes close to 1,100 products, with total combined assets nearing the $1 trillion mark. It is clear that investors are becoming increasingly comfortable with the idea of gaining exposure to all types of asset classes through the ETF wrapper. Fixed income has been a major source of ETF growth this year, as cash inflows to bond ETFs ($28 billion) surpassed those into domestic equities equities ($20 billion) through November. Another hot spot in the ETF world is in commodities, where a number of products enjoyed astonishing returns for the year.
Commodity ETFs have been strong across the board, as a weakening greenback has helped push up prices for resources traded globally in U.S. dollars. Aside from the sliding dollar, a number of factors have combined to create a healthy year for nearly all commodity ETFs. Numerous supply issues and heightened demand from emerging markets helped to send many commodity prices to levels not seen since before the financial bubble popped in late 2008. With this asset class garnering a lot of attention due to its impressive gains, we outline the five top performing commodity classes within the ETF world for 2010.
Coffee prices have soared in 2010 due to a number of complications with production. For starters, yields from Central/South America and Vietnam – two of the world’s top producing regions – have been poor as growing conditions were less than ideal for the season. This combined with U.S. stockpiles hitting multi-year lows to send coffee surging in price, although most consumers have yet to feel the pinch at their local coffeehouses. Nevertheless, futures for this hot commodity have soared throughout the year, helping to push the iPath Dow Jones-UBS Coffee ETN (NYSEARCA:JO) higher by almost 43% since the start of January.
As the fourth-best performing commodity class, tin introduces a trend for the year: Surging demand (and prices) for metals. As emerging markets have continued to turn in impressive GDP growth figures, demand for any materials used in construction or infrastructure development has surged. Approximately half of the tin produced globally is used in soldering, while the rest is divided among tin plates, chemicals, brass/bronze, and glass, among other products. Interestingly, tin is not a naturally occurring metal; it must instead be extracted from various base compounds. The iPath Dow Jones-UBS Tin ETN (NYSEARCA:JJT) has gained over 50% in 2010, making it one of the year’s best-performing commodities.
Though gold’s impressive rise to record highs has been well documented this year, the yellow metal has actually been outdone by other, lesser-known precious metals. As the dollar has weakened and markets remain uncertain, investors rushed into this shiny commodity to help protect their portfolios from continued weakness in both bonds and equities. Unlike gold, silver is used in a wide variety of industrial applications, meaning that there are more fundamental drivers of the metal’s supply. The four main silver ETFs -- DBS, SIVR, SLV, and USV -- have all gained about 65% on the year, dwarfing the returns to gold in 2010; GLD was recently up a still impressive 25% on the year.
Palladium, which belongs to the platinum group metals (PGMs), is another of the precious metals that has outperformed gold so far in 2010. Palladium has numerous industrial uses, so it can act as more than just an inflation hedge as it is used in a number manufacturing processes today. In fact, one in four products manufactured today use PGMs as a key component of the production process or in the product itself. Additionally, palladium is vital to catalytic converters, which are found in car exhaust systems. As the car industry has rebounded in 2010, thanks to solid sales in both emerging and developed markets, demand for these palladium-laden devices has soared as well. The ETFS Physical Palladium Shares (NYSEARCA:PALL) has returned close to 70% on the year (it debuted in early January), making it one of the best commodity ETF performers.
Cotton prices have surged thus far in 2010 to heights not seen since the Civil War era, as a number of global issues forced a price spike in the fluffy commodity. Inclement weather in China and Pakistan, two of the world’s largest cotton producers, slaughtered global supply, sending prices through the roof. Then, on top of poor cotton yields, a growth in global demand thanks to growing middle classes in emerging markets created a bottleneck, as China’s output was predicted to be 18.5 million bales less than what the local economy demanded. The iPath Dow Jones-UBS Cotton ETN (NYSEARCA:BAL) has so far gained more than 85% on the year, with an additional boost to the fund coming from a backwardated futures curve.
Disclosure: All data as of December 10, 2010. Picture courtesy of Julius Schorzman. No positions at time of writing.
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