Megaphone icon ETF Database is now VettaFi. Read More >
ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • Entrepreneur ETF
    • Equity ETF
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Future ETFs
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Modern Alpha
    • Multi-Asset
    • Multi-Factor
    • Nasdaq Investment Intelligence
    • Portfolio Strategies
    • Retirement Income
    • Smart Beta
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Videos & Podcasts
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Portfolio Management
  2. What ETF Investors Need to Know About El Niño
Portfolio Management
Share

What ETF Investors Need to Know About El Niño

Stoyan BojinovJan 14, 2016
2016-01-14

The weather phenomenon dubbed El Niño has been known to wreak havoc across financial markets as tumultuous weather often leads to heightened volatility on Wall Street.

This article examines the economic implications of El Niño and how investors can use ETFs to profit from the weather pattern.

What is El Niño?

Perhaps best described as an irregular series of climatic changes in weather, the term “El Niño” refers to the warming of the eastern and central Pacific Ocean. The weather pattern is said to occur every four to 12 years as weakened trade winds disrupt the typical pattern of coastal upwelling; this prevents cold water from rising to the surface, which in turn leads to unusual, and often extreme, weather conditions around the world. El Niño is known to kill fish and plankton, cause droughts and bring heavy rains.

These irregular climate conditions tend to develop from April through June, reaching maximum strength in December through February. El Niño is said to persist anywhere from nine to 12 months but can last as long as two years.


Content continues below advertisement

Economic Implications of El Niño

El Niño’s economic impact spans far beyond the predictable negative consequences on the fishing industry. This weather phenomenon can influence commodity markets in unpredictable ways, which translates into a ripple effect across industries and countries in today’s ever-so-connected global economy.

In fact, the effects of El Niño on commodity prices are well-documented. Consider the following research from the IMF:

The Effects of an El Niño Shock on Real Commodity Prices

.Cumulated Response after 1 Quarter2 Quarters3 Quarters4 Quarters
Non-Fuel Commodity Prices0.77%1.97%3.75%5.31%
Oil Prices4.23%7.80%11.09%13.87%

Key takeaways:

  • Higher temperatures and droughts increase agricultural commodity prices in light of unfavorable growing conditions.
  • The absence of rainfall increases demand for power generation from coal and other nonhydroelectric sources.
  • Droughts increase water demand for irrigation purposes, which further drives up energy prices.

There appears to be a tailwind effect to commodity prices following El Niño shocks; oil prices in particular show a very positive reaction following weather extremities.

The study from the IMF further goes on to conclude that most countries experience inflationary pressures in the short term following El Niño-related events, which is of course in large part due to rising food and energy prices.

The economic implications of El Niño go beyond commodity prices. This weather phenomenon can constrain supply chains of all sorts, slow down construction, disrupt usual business service activity, and even trigger social unrest in commodity-dependent countries.

ETFs to Play El Niño

Investors and traders have a variety of options at their fingertips when it comes to trading around this weather anomaly.

Volatile weather translates into unpredictable harvests for any number of agricultural commodities accessible via ETPs, including:

  • Cotton ETPs.
  • Sugar ETPs.
  • Cocoa ETPs.
  • Coffee ETPs.
  • Corn ETPs.
  • Soybeans ETPs.
  • Wheat ETPs.

On the energy front, traders can pick from these single commodity ETPs:

  • Crude Oil ETPs.
  • Natural Gas ETPs.
  • Gasoline ETPs.
  • Heating Oil ETPs.

Metals prices may also come into focus following an El Niño shock as investors fret over mining supply concerns in Chile due to heavy rains in the mountains, or perhaps in light of increased safe haven demand:

  • Copper ETPs.
  • Precious Metals ETPs.

For a wider-net play, consider starting your screening process from the broad-based Diversified Commodity ETPs list.

The Bottom Line

If you plan to trade commodity ETPs around El Niño shocks, be prepared for even more volatility than is inherently associated with this category of products. After doing your fundamental research, don’t forget best practices when it comes to ETF trading; this includes using limit orders on entry and placing stops to cut losses and lock in profits on exit.

Follow @SBojinov

mage courtesy of jukree at FreeDigitalPhotos.net

» Popular Pages

  • Tickers
  • Articles

Jun 30

Are U.S. Equities Overrated?

Jun 30

RSP Increases On Utilities and Real Estate Gains

Jun 30

China Tech Stocks See Reconvened Buyer Interest

Jun 30

Grayscale Sues Over SEC’s Denial For Fund Conversion

Jun 30

Crypto Logs: Bitcoin ETFs and Index-Based Crypto ETFs

Jun 30

ETF of the Week: iMGP DBi Managed Futures Strategy ETF

Jun 30

LGBTQ Americans Less Confident Saving for Retirement

Jun 30

See Opportunity in China? CXSE Invests in Non-State-Owned Companies

Jun 30

BondBloxx Debuts Duration-Focused Emerging Market ETF

Jun 30

BlackRock Launches Investment Grade Corporate Bond ETF

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

TQQQ

ProShares UltraPro QQQ

ARKK

ARK Innovation ETF

SCHD

Schwab US Dividend Equity ETF...

VTI

Vanguard Total Stock Market...

XLE

Energy Select Sector SPDR...

VNQ

Vanguard Real Estate ETF

XLV

Health Care Select Sector...

Loading Articles...
Help & Info
  • Contact Us
  • Mission Statement
  • Press
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © ETF Flows LLC
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X