ETF Outlook Perks Up in Commodities as Gold Funds Defy Exit

(Bloomberg) -- Gold has been one of the few bright spots in commodity ETFs this year, with investors pouring in the most money since 2016 as funds linked to most other raw materials saw withdrawals. But the outlook across the sector in 2020 may be brighter.

About $18 billion flowed into long-only gold-backed exchange-traded funds as of Friday, with a decline in U.S. borrowing costs boosting the appeal of non-interest-bearing assets such as precious metals. That more than offset an exodus in energy, base metals, broad-based and agriculture ETFs that came as the U.S.-China trade war and a slump in global manufacturing fueled demand concerns.

With the U.S. and China agreeing to a partial trade deal and tentative signs that factory output is on the mend, speculators may be set to give the ETFs another look. Goldman Sachs Group Inc. said declining inventories and a dearth of investment needed to expand output will help spur a rebound in spot prices. Bank of America Corp. sees manufacturers restocking finished goods, adding to demand and helping boost returns for commodities.

“If you can remove the overhang from the trade part, there’s actually quite a few commodities that have a very favorable supply-demand balances and should anticipate prices to go up from here,” Darwei Kung, head of commodities and portfolio manager at DWS Investment Management Americas Inc., said in a telephone interview.

The on-again, off-again trade talks between the U.S. and China had caused gyrations in commodity prices, capping this year’s gains in the Bloomberg Commodity Spot Index at about 11%. By comparison, the S&P 500 index advanced 29%. Hedge funds have grown increasingly impatient with raw materials struggling to sustain rallies. Money managers’ combined net-bullish bets across 18 commodity futures fell by more than a third in the first 11 months of 2019, before recovering in December.

Investors took out about $1.2 billion from long-only energy-focused funds, $200 million from industrial-metals ETFs and $260 million from those linked to agriculture. They withdrew $1.5 billion from ETFs linked to broad baskets of raw materials, the biggest-ever annual outflow in data compiled by Bloomberg starting in 2005. But total flows into raw-materials ETFs, buoyed by the gold investment, still reached almost $18 billion, the most in three years.

“I do think the soccer ball could end up getting kicked over to commodities, or alternatives, at some point,” Eric Balchunas, an ETF analyst at Bloomberg Intelligence, said in a phone interview. “It’s just been neglected because the performance just hasn’t been there relative to stocks and bonds.”

Whether ebbing trade frictions, easy monetary policy and signs of improvement at factories translate into better performance for broad-based commodity ETFs in 2020 may hinge on how long the U.S.-China trade detente remains in place. The two countries have put off for later discussions issues such as longstanding Washington complaints over the vast web of subsidies ranging from cheap electricity to low-cost loans that Beijing has used to build its industrial might.

“Part of the uncertainty has been removed, so I think that’s allowed a number of cyclical commodities to rally,” said Nitesh Shah, London-based director of research at WisdomTree. “Base metals, oil, they’re all doing fairly strongly. So I think the market has welcomed the scale-back of those tariffs and the postponement of the tariffs, but they’re still keeping their hedges in place so gold is still in vogue.”

--With assistance from Aoyon Ashraf.

To contact the reporters on this story: Justina Vasquez in New York at jvasquez57@bloomberg.net;Yvonne Yue Li in New York at yli1490@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Joe Richter

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