Increasing numbers of retail investors are being drawn into commodities trading after two consecutive years of bumper returns, despite fears they could suffer huge losses or disrupt complex and volatile markets.
Retail trading volumes rose in commodity futures and the largest commodity-focused mutual funds in 2022. But while the activity has been driven by a much better recent record in commodities than in stocks and bonds, some market participants and analysts have expressed concerns about retail traders wading in. A highly volatile market dominated by specialized players.
Average daily trading volumes in the Chicago Mercantile Exchange’s small contracts for gold, crude oil, silver and copper — which it uses as a proxy for retail activity — were up 93 percent year-on-year through the end of November.
Volumes in the $6 billion Invesco ETF — the largest broad-based commodity fund popular with retail investors — jumped more than 60 percent and were nearly three times higher than in 2020. Volumes were up across its broader group of funds. commodities by 50 percent.
“We caught everyone’s attention last year because people were concerned about inflation,” said Kathy Kresky, commodity ETF strategist at Invesco. And then, after the invasion of Ukraine, people started focusing on geopolitical risks [too]. “
The explosion in business activity came as the S&P GSCI raw materials price index rose nearly 9 percent last year as the war in Ukraine limited supplies, in stark contrast to losses of more than $30 trillion in stocks and bonds.
goods It was the top-performing major asset class for each of the past two years, according to Bank of America, and was one of only two asset classes to gain in 2022 along with cash. Commodity-focused companies were also the only sub-sector of the US stock market that made an advance, with the S&P 500 energy sub-index advancing 54 percent as of December 21.
However, while full-year returns were strong, commodities trading remains risky, with markets subject to wild volatility that can catch retail investors by surprise. In April 2020, for example, the major US oil contract traded below zero for the first time. Many retail traders and platforms did not consider the possibility of negative pricing, and retail brokerage IBKR lost $88 million covering margin calls for clients who were caught up in the price crash.
“These are very complex markets where you can lose . . . everything you carry with your [broker] within minutes.”
Besides the risks to retailers themselves, Bland said he’s also worried about the impact it could have on other market participants, from airlines to farmers.
People depend on us at these prices. Building retail products around something people make billions of decisions about. . . It’s not something you should do lightly. People don’t want to bet on what is essentially their livelihood.”
Newer indices like Invesco’s have updated their strategies to avoid some of the problems that plague commodity funds, which sometimes lost money even when prices rose due to quirks in futures pricing.
“We’ve gone to great lengths to educate our investor base because… people either have never touched commodities and don’t understand them, or they’ve known them for 10 years,” said Invesco’s Kresky.
She stressed, “You don’t need a lot for [commodities] To be influential in your portfolio. . . We talk a lot about 5 percent exposure, and we don’t want investors to come in and say, “I’m a 15 percent commodity.”
Some companies have encouraged riskier bets. Hong Kong-based CSOP Asset Management announced late last year that it would begin offering retailers exposure to an index for large oil and gas stocks. Leverage allows investors to multiply their potential gains, but it can also quickly wipe out capital when stock prices drop.
ProShares, one of the most popular providers of tactical ETFs with retail investors, manages eight funds that give leveraged exposure to commodity futures. Leveraged short exposure natural gas ETFs are down more than 93 percent since the start of the year.
ProShares CEO Michael Sapir acknowledged that leveraged commodities trading can be risky, but said retail investors deserve to have the same options available to institutional investors.
Exchange-traded products that offer a reverse exposure to oil and gas have been hit hard, down nearly 90 percent since the start of the year as prices have soared due to the Ukraine war, according to the Morning Star.
“Commodities can rise or fall without investor preparation, more so than stocks,” said Todd Rosenbluth, head of research at VettaFi. He said retail investors deserve the same options as institutional investors. “But is it OK for everyday investors to have exposure, to have to manage roll costs and the volatility that comes with commodities? That’s a fair question.”
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