By Laura Crigger
Annual Inside ETFs Conference this past week: After years—even decades—of investors perceiving commodities merely as a way to hedge domestic inflation, protect against a falling dollar or belay some other domestic downside risk, the asset class has suddenly become the optimist's play.
If you're optimistic about emerging markets, that is.
Few of the more than 85 panelists at the conference betrayed much confidence at all in the future sustainable health of U.S. and other developed markets. Russ Koesterich, global chief investment strategist for BlackRock, pointed out that the U.S. currently suffers "the worst deficits in history outside of a major war." Cumberland Advisors' David Kotok argued the domestic growth rate would be crippled by "chronic unemployment for a cohort of our population" for the foreseeable future. Kevin Kerr, editor of Commodities Watch, even discussed hyperinflation in U.S. and European markets with the same calm as he would ordering a cup of tea.
But concerns about U.S. economic health weren't the reason why panelists were recommending increased commodities investment. Instead, the argument came back again and again to China, Brazil, Vietnam and a whole host of other emerging countries currently expanding their infrastructure, increasing their domestic consumption levels and improving their citizens' lives.
While the so-called China story may seem old hat to we commodity buffs here at HAI, to see it gain such popularity and acceptance among the wider financial industry was remarkable.
Even when I attended Inside ETFs last year, healthy debate raged on the panels about whether commodities counted as an asset class, or whether investors should risk their money on such high-risk, low-return assets. (Remember, this was during the 2010 commodity slowdown, when commodity prices remained sluggish and the reality of the U.S. economic recovery was still a big question mark.)
But this past week, I discovered that among the financial industry's smartest and most high-profile minds, few—if any—doubters remained.
Panelists and attendees alike haven't just accepted commodities as an asset class. They're treating them now as a given, one of the "four traditional asset classes," according to Kotok.
Which means the discussion can move on to more interesting topics—such as how to best play the China growth story.
Some Highlights From The Inside ETFs Conference:
During the Evaluating ETFs: Selecting the Best Asset Class keynote, IndexUniverse Director of Research David Nadig explained that when it comes to commodities funds, how an ETF obtains its exposure is one of the most important things one can know about the fund. "If in 2010, you picked the wrong crude oil ETF—USO—you lost 5 percent. If you picked USL, however, you managed to make 8 percent," he said.
In Commodity ETFs: How to Gain Access to Spot Returns (moderated by yours truly!), discussion centered about the always-thorny issue of contango/backwardation. "Contango is not a bad word," Sal Gilbertie, co-founder of Teucrium Trading, reminded the audience. "You can still make money in contangoed markets."
The sentiment was echoed in Accessing Uncorrelated Returns: The Hunt for Alpha, where panelist Kevin Ireland, vice president of ALPS Advisors' Institutional Sales department, compared contango to a "name of a bad dance step" and said that it was one of the most misunderstood issues in the commodity markets today.
Indeed, one of the only commodity-related panels where contango didn't rear its head was in Gold: An Ideal Hedge? That panel centered more on how ETFs have revolutionized the way investors think about gold, transforming it from a niche, physical investment into a full-fledged asset class. Of course, this has its positives (not the least of which being increased recognition of gold as a viable store of value) and its negatives: The IRS still treats gold investment as a collectible and taxes gold ETF holdings as "bad income"—a problem Jason Toussaint of the World Gold Council admitted his organization was currently lobbying hard to resolve.
ETFs were also pointed out as an ideal way to access emerging market infrastructure improvements in Accessing Asia and China, and to hedge out negative currency risk in Europe and the Euro: Crisis or Opportunity.
Indeed, the democratizing effect of ETFs on the markets was an ever-present theme at the conference. Five years ago, a panel titled ETFs, Mutual Funds or Both? would have seemed ludicrous, with active managers and advisors turning up their noses at ETFs in favor of mutual funds. But at this week's panel, few audience members seemed willing to admit they still relied on mutual funds, and much of the Q&A focused on how to break up with your mutual funds for good.
Overall, Inside ETFs offered commodities investors plenty to chew on, with lots of hands-on strategies and contentious debates peppering the panels. These were just a few of the ideas offered—be on the lookout for notes and commentary from other sessions in the days to come.