Commodity Funds Hemorrhage Cash as Investors Bail at Record Pace

Why Investors Are Fleeing Commodity ETFs
  • Losses for precious metals, agriculture overwhelm energy gains
  • Value of ETFs tracking broad-based raw materials plunged 26%

Investors can’t seem to get away from non-energy commodities fast enough.

A record $857 million was pulled this year from U.S. exchange-traded funds backed by broad baskets of everything from grains to metals, according to data compiled by Bloomberg through Dec. 23. The value of the funds plunged 26 percent as raw materials tumbled to a 16-year low. Hedge funds are expecting more losses, betting on price declines for gold, copper, corn and natural gas.

While energy-linked funds were the only commodity group to see net inflows this year, oil and gas didn’t escape an almost across-the-board decline in prices. Sentiment has turned negative after a decade-long bull market that was driven by China’s hunger for crops, metals and fuel. Producers rushed to meet that demand, resulting in expanded supplies that are now causing gluts as the country grapples with the weakest economic growth in a generation.

“Being out of the commodities market has worked well for us in 2015,” said Alan Gayle, a senior strategist for Atlanta-based Ridgeworth Investments, which oversees $39 billion. “We’ve got a combination of softer demand and excess supply. And until we see signs of either of those issues turning around, then we’re staying on the sidelines.”

The Bloomberg Commodity Index, a measure of returns for 22 components, slumped about 25 percent in 2015. The gauge is headed for a fifth annual loss, the longest streak since the data begins in 1991.

Investors pulled money from ETFs backed by agriculture, livestock and industrial metals this year, according to the data, which goes back to 2006. Outflows for precious metals accelerated in the final three months of the year, with the biggest net-withdrawal in almost a year as the Federal Reserve raised interest rates.

The new year may offer some glimmer of hope. With most commodities trading near their cost of production, some investors are speculating that prices are near their bottom. Gold, wheat and natural gas were forecast to rebound in 2016, according to a Bloomberg survey of 108 traders, analysts, economists and strategists across Asia, Europe and the Americas.

Goldman Sachs Group Inc. is also expecting some recoveries. Analysts led by Jeffrey Currie forecast the Standard & Poor’s GSCI Enhanced Total Returns commodity index, the bank’s preferred measure, will climb 3 percent over the 12 next months, a Dec. 21 report showed. Energy will lead the gains, rising 7 percent over the period, the bank said.

Crude’s collapse in 2015 will continue through the first part of 2016, Goldman’s Currie said, predicting oil traded in New York could fall to $20 a barrel, forcing production shutdowns. The supply cuts will eventually help to support prices, currently at about $38, and the commodity could rebound to $50 in 12 months, the bank said.

Investors are also positioning for a bottom. They poured $8.9 billion this year into energy funds through Dec. 23, the biggest annual inflow since data began 2006. The optimism came even as prices slumped for natural gas, Brent crude, West Texas Intermediate and heating oil, making them four of the five worst performers on the Bloomberg Commodity Index this year.

Money flowed into energy-backed ETFs on optimism that this year’s slump will force producers to cut supply, eventually triggering a rebound, said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $130 billion of assets. The Organization of Petroleum Exporting Countries has defended its market share by maintaining output to force higher-cost producers to shut operations. Declining U.S. production will help to “halt the oil surplus” by the fourth quarter of 2016, the Goldman analysts wrote.

“The way the supply response has unfolded has been much slower than I expected or anyone I was reading expected,” Haworth said in a phone interview. “Now you’re waiting for a number of independent decisions for supply to balance with demand, and it’s going to take more time.”

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