Oil, Agriculture ETFs Lure Biggest Investments Amid Sell-Off

The U.S. Oil Fund and Market Vectors Agribusiness ETF attracted more money than any other U.S. exchange-traded fund in the past week following the biggest retreat in commodity prices in more than two years.

The ETF that tracks the price of oil drew $514.4 million in the past week, according to data from New York-based research firm XTF Inc. The agriculture fund, which tracks the share prices of 46 companies such as Deere & Co. (DE) and Syngenta AG (SYNN), got $500.9 million, the data show.

Investors “are not yet willing to give up on the weak dollar and inflation trade,” said Nicholas Colas, the New York- based chief market strategist at BNY ConvergEx Group LLC. “They are cycling into agriculture and energy-oriented investments, even though the price action is choppy.”

Crude oil fell 15 percent last week following the death of al-Qaeda leader Osama bin Laden. It rose 6.9 percent the first two days this week on concern about flooding in the midwestern U.S., before declining 5.5 percent yesterday when an Energy Department report showed that U.S. supplies surged and fuel demand slipped. Corn has gained 77 percent in the past year on record use by ethanol producers, while wheat has advanced 49 percent after drought slashed output in Russia.

The oil ETF, which tracks the price of crude, fell 0.2 percent to $39.28 as of 4 p.m. in New York. The agricultural fund dropped 1.6 percent to $52.74.

Short Selling

Some investors may be creating new shares of the funds in order to short the commodities, according to Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore.

Short interest in the agricultural ETF rose to 2.8 percent of shares outstanding as of May 10, from 0.5 percent on April 25, according to Data Explorers, a New York-based research provider. That’s the highest level since March 24. For the oil fund, short interest ranged between 8 percent and 12.5 percent from April 25 through May 10 and averaged 9.2 percent over that time, Data Explorers said.

“Investors are hedging at lower prices after the big commodity sell-off we had,” Lutz said in a telephone interview yesterday. He said it’s possible that much of the inflow could be from investors betting on declines, because “even if you’re shorting an ETF, the ETF still needs to be created, that increases assets under management.”

Lutz said that while oil may continue to decline on increasing U.S. supply, investors may be piling into the agriculture ETF as they bet on long-term demand for food commodities and perceive the sell-off as a buying opportunity.

Assets in commodity exchange-traded products and funds rose to $220.7 billion in April from $200.3 billion at the end of March, BlackRock Inc. said in an e-mailed report yesterday. ETFs trade on an exchange throughout the day like stocks. Large buy orders are made through authorized agents who purchase blocks of the underlying holdings and trade them with the fund to create new shares.

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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