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ETF Securities Ltd., the company that pioneered the development of Exchange Traded Commodities and which created the world's first entire ETC platform (listed on the London Stock Exchange in September 2006) has released a study showing that commodities outperformed equities by 40% in the first half of this year.  The group says that ETFS All Commodities DJ-AIGCISM for all commodities gained 15.6% in the second quarter of 2008 and were up by 226.8% in the first half of the year, while 16 ETC's gained more than 50% in the first half.

Equities and real estate were the worst performing asset classes for the second quarter in succession, with the S+P 500 index dropping by 11.9% in the first half of the year, the DJ EuroStoxx50 down by 15.6% and the FTSE100 losing 10.5%.  Combining these figures gives an outperformance by the commodities of some 40% over the first half.  Among the commodities and baskets of commodities to which ETF Securities provides exposure, ETFS Natural Gas was the best performer in the first half, while the poorest performances came from ETFS Lean Hogs, ETFS live Cattle, ETFS Sugar, ETFS wheat, ETFS Zinc and ETFS nickel in the negative column.  The table below summarises the changes since the start of the year:

Net Asset Values of the ETF Securities ETCs, January - June 2008-07-02

The group also asserts that commodities have been the top performing asset class in five of the past ten years.  Over that period, real estate was the top performer for 30% of the time, with bonds and equities 10% each.  The DJ-AIG Commodities index has returned approximately 12.8% per annum over ten years, against 3.4% for the MSCI World equity index.  Further analysis suggests that increasing global financial and real economy integration over the past ten years has meant that many markets have tended to move together during periods of volatility or stress, such as the current environment and their correlations have thus become higher.

This leads to the argument in favour of the use of commodities as a tool for portfolio diversification, which is presumably being sidestepped by the latest Congressional proposal to ban pension funds from investment in commodity markets in the United States.  Fund investment in commodity indices has grown from an estimated $13 billion five years ago to $260 billion at the end of the first quarter of this year, an average increase of 82% per annum. At ETF Securities itself, the precious metals ETCs added $1.6 billion (138%), with ETFS Physical Gold and ETFS Physical Platinum adding $1.3 billion between them.  Agriculture ETCs added $1.2 billion (131%) while ETFS Agriculture and ETFS Forward Agriculture added $807 million.  Livestock ETCs added $238 million, an increase of 1,080% spread evenly across livestock, lean hogs and cattle.  ETF Securities asset growth was this nearly 152% during the first half year to reach approximately $6.3 billion at the end of the half.

Meanwhile the IMF's International Financial Services London (IFSL)'s latest commodities trading report, released at the end of June, notes that in the five years up to 2007, the value of global physical exports of commodities increased by 17%, while the notional value of outstanding commodity OTC (Over the Counter) derivatives increased by more than 500% and commodity derivative trading on exchanges grew by more than 200%>.

The notional value of banks' OTC commodities' derivative contracts increased by 27% in 2007 to $9.0 trillion, with precious metals accounting for just 8% of OTC Commodities derivatives trading in 2007, down from a massive 55% share ten years ago.  Centre-stage has, of course, been lost to the energy sector.  Global physical and derivative trading of commodities on exchanges increased by more than a third in 2007 to reach 1,684 million contracts, with agricultural contract trading growing by 32%, energy by 29% and industrial metals by 30%.  Precious metal trading grew by just 3%, with increased volume in New York being partially offset by declining volume in Tokyo.

Over 40% of commodities trading on exchanges was conducted in US exchanges, but, interesting to note, a quarter was in China.  India is also gaining traction.  London held 17%, via the LME, Euronext.liffe (softs) and ICE Futures (energy products).  The IFSL also notes the diversification benefits of inclusion of commodities in a portfolio.  Whether certain elements of Congress like it or not, commodities investment has arrived at the party and is showing no sign of going home.