Brad Zigler is the managing editor of Hard Assets Investor, an educational Web site devoted to commodity education and commentary. Prior to his current role as managing editor of Hard Assets Investor, Mr. Zigler was head of marketing, research and education at Barclays Global Investors’ iShares exchange-traded funds complex and at Pacific Exchange’s (now NYSE Arca) options market. In addition, he has written for Mutual Funds, Financial Planning, Financial Advisor, Futures, Registered Rep., and Ticker magazines as well as TheStreet.com and MarketWatch.com. Mr. Zigler was gracious enough to discuss commodity ETFs, hard asset investing, and more in an exclusive e-mail interview with ETF Database.
ETF Database: The stock market’s dismal performance in the past few years has led to increased retail investor interest in hard assets (both directly, and through vehicles like ETFs). If and when the stock market gets on more solid footing, will the retail investor interest in hard assets decline?
Mr. Zigler: If history is any guide, it’s likely that retail interest in commodities WILL wane when paper assets are ascendent. In the past, though, it was more difficult for individual investors to gain access to the asset class. Before the introduction of commodity ETFs and ETNs, investment options were limited to highly leveraged futures, or expensively managed commodity pools. The availability of low-cost exchange-traded products may result in some residual retention of exposure, but I’m fairly sure there’ll be a dramatic decrease in asset commitments.
ETF Database: Many investing experts recommend holding a small percentage of every retirement portfolio in some sort of commodity fund, the theory being that it will act as a hedge against inflation and the stock market’s performance. What are the advantages of doing so, versus holding an inflation-protected bond fund? Should every long-term investor have a foothold in commodities?
Mr. Zigler: Long-only commodity portfolios may not be the inflation hedge that many advisors or investors think them to be. First of all, there’s contango which is a manifestation of the carrying charges (storage, insurance and interest costs) built into the futures pricing structure. Contango, as many investors have belatedly learned, can cut into the products’ returns and lower their effectiveness as hedges. Then there’s the products’ weighting schemes. Portfolios based upon a benchmark that skews more heavily toward energy costs are going to grow at a different pace than one that overweights agricultural commodities. In recent years, energy costs have been a key driver of increases in the Consumer Price Index. Increases in energy costs cascaded down the value chain, and trigger increases in other products. You might say that products skewing to energy tend to be better hedges for early stage inflation while those that weight agricultural commodities more heavily are better hedges for mid-to-later-stage inflation. All this points to a need for investor understanding of the products and their underlying benchmarks. That said, the real benefit of a commodities allocation is portfolio diversification. In that regard, perhaps it’s best to hold an allocation for BOTH commodities AND inflation-protected securities.
ETF Database: It seems that every month sees the issuance of a new commodity ETF sector, with many new types of commodity ETFs (e.g. platinum) in the works. Is this a good thing? Should every commodity with enough trading volume have its own ETF?
Mr. Zigler: I’m a big fan of choice. There have been times–often chronicled in my daily “Brad’s Desktop” column–when I’ve been frustrated that certain exposures yet weren’t available. Not every investor, however, is going to care if there’s a short, leveraged exposure to platinum or cocoa. For investors looking for a permanent portfolio allocation to commodities, a highly liquid, broad-based long-only exposure may be all they need; the tactical hedging stuff can well be left to professional. The marketplace is a sorting mechanism that culls superfluous products. If a product is too narrowly focused, it won’t be rewarded with assets. At some point, its sponsor will simply withdraw it from the marketplace.
ETF Database: There’s been a lot of discussion in the past few years about the performance of, and interest in, “alternative” asset classes like wine, art, etc. Are there any alternative hard asset classes that are being overlooked? Do you think any type of hard asset will surprise in the next decade?
Mr. Zigler: The key to creating tradeable vehicles is liquidity of the underlying market. Liquidity, in turn, depends upon transparency. Participants must be able to see transactions as they occur and there have to be enough price points visible for investors to obtain a reasonable sense of the market. Market makers, too, must have the means to hedge their exposures through highly correlated derivatives such as futures or options. In the hard assets space, there’s been growing interest in strategic, or minor, metals as well as in diamonds. The market are still largely cartel-priced, limiting their utility as the bases for exchange-traded products.
ETF Database: Any words of wisdom–perhaps an unconventional investing tip–you could share with our readers?
Mr. Zigler: I actually have some very CONVENTIONAL advice for investors: Do your homework! No one should be investing in, say, commodity products without first knowing about the vagaries of the commodities markets. Investors should know the forces that drive their commodity’s price. Are there seasonal factors favoring certain entry/exit times? What’s the likelihood of the market moving from contango to backwardation or vice versa? Is there a likely “haircut” to be taken for illiquidity? It’s issues like these that we tend to address in the educational articles on Hard Assets Investors.