Commodities trading boom raises fear of big losses among retail investors

Commodities trading boom raises fear of big losses among retail investors

‘People don’t want to see betting on what is essentially their livelihoods’

Article content

Growing numbers of retail investors are being drawn into commodity trading after two consecutive years of bumper returns, despite concerns they could suffer huge losses or disrupt the complex and volatile markets.

Advertisement 2

Story continues below

Article content

Retail trading volumes in commodity futures and the largest commodity-focused investment funds surged in 2022. But while activity has been spurred by commodities’ much better recent record than that of stocks and bonds, some market participants and analysts have voiced fears about retail traders wading into a highly volatile market dominated by specialized players.

Article content

Daily average trading volumes in CME Group Inc.’s micro contracts for gold, crude oil, silver and copper — which it uses as a proxy for retail activity — were up 93 per cent year on year as of the end of November.

See also  The Margin: One look at this scary clip and you’ll be glad you weren’t flying around Europe during Storm Ciara this weekend

Trading volumes in Invesco Ltd.’s US$6-billion Optimum Yield Diversified Commodity Strategy No K-1 ETF — the largest broad-based commodities fund, which is popular with retail investors — jumped more than 60 per cent and were almost three times as high as in 2020. Volumes across its broader suite of commodities funds climbed 50 per cent.

Advertisement 3

Story continues below

Article content

“We got everyone’s attention last year because people were nervous about inflation,” Kathy Kriskey, commodities exchange-traded fund strategist at Invesco, said. “And then after the invasion of Ukraine, that’s when people started focusing on geopolitical risk (too).”

The burst of trading activity came as the S&P GSCI index of raw materials prices jumped almost nine per cent last year as the war in Ukraine restricted supplies, drawing a stark contrast to the more than US$30 trillion in losses for equities and bonds.

Commodities have been the best-performing major asset class for each of the past two years, according to Bank of America Corp., and were one of just two asset classes to make gains in 2022 alongside cash.

Advertisement 4

Story continues below

Article content

Commodity-focused companies were also the only subsector of the United States stock market to advance, with the S&P 500 energy sub-index advancing 54 per cent as of Dec. 21.

However, while full-year returns have been strong, commodity trading remains risky, with markets liable to extreme swings that can catch retail investors off guard.

In April 2020, for example, the main U.S. oil contract traded below zero for the first time. Many retail traders and platforms had not considered the possibility of negative prices, and the retail brokerage Interactive Brokers LLC lost US$88 million covering margin calls for customers caught out by the price collapse.

See also  Pipelines, telcos, industrials? Here’s what Canadian companies Warren Buffett might like

Trabue Bland, senior vice-president for futures exchanges at Intercontinental Exchange Inc., cautioned at a recent industry conference that “these are very sophisticated markets where you can lose … whatever you put up with your (broker) in a matter of minutes”.

Advertisement 5

Story continues below

Article content

People rely on us for those prices

Trabue Bland

Besides the risks for retail traders themselves, Bland said he was also concerned about the impact they could have on other market participants, from airlines to farmers.

“People rely on us for those prices,” he said. “Building retail products around something that people are making multibillion decisions on … is not something you should do lightly. People don’t want to see betting on what is essentially their livelihoods.”

Modern indexes such as Invesco’s have updated their strategies to avoid some of the problems that afflicted early commodities funds, which sometimes lost money even when prices rose due to quirks in the pricing of futures contracts.

“We’ve made a huge effort to educate the investor base because … either people have never touched commodities and don’t understand them, or they knew them 10 years ago,” Kriskey said.

Advertisement 6

Story continues below

Article content

She said “you don’t need a lot for (commodities) to be impactful in your portfolio … we talk a lot about a five-per-cent exposure, we don’t want investors coming in and saying ‘I’m 15 per cent commodities.’”

Some companies have encouraged riskier bets. Hong Kong-based fund provider CSOP Asset Management Ltd. late last year announced it would start offering retail traders leveraged exposure to an index of large oil and gas stocks. Leverage allows investors to multiply their potential gains, but can also quickly erase capital when share prices fall.

  1. Financial expert Ted Rechtshaffen has made 23 predictions for 2023 including calls on bitcoin, the loonie, where cannabis stocks are headed and the ongoing role in the new year of Russia's war against Ukraine.

    23 investing and personal finance thoughts for what’s to come in ’23

  2. A stock trader works on the floor of the New York Stock Exchange on Dec. 21 in New York City. It's been a tough year for the classic 60/40 investment portfolio.

    Choppy stock, bond markets make alternative investments more attractive

  3. Freshii Inc. announced it will be acquired by Foodtastic Inc. at a premium of 129 per cent. If valuations stay weak, expect to see more deals in 2023.

    Five glimmers of hope for investors in the new year

Advertisement 7

Story continues below

Article content

ProShares, one of the most popular tactical ETF providers with U.S. retail investors, operates eight funds with leveraged exposure to commodity futures. Its leveraged short exposure natural gas ETF is down more than 93 per cent since the start of the year.

Exchange-traded products offering inverse exposure to oil and gas have been hard hit, down almost 90 per cent since the start of the year as prices have risen because of the Ukraine war, according to Morningstar Inc.

“Commodities can spike or crash without investors being prepared, more so than equities,” said Todd Rosenbluth, head of research at VettaFi LLC.

He said retail investors deserved to have the same options available to institutional investors.

“But is it good for everyday investors to have exposure, and to have to manage the roll costs and volatility that come with commodities? That’s a fair question.”

© 2023 The Financial Times Ltd.


If you liked this story, sign up for more in the FP Investor newsletter.



Story continues below


Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

See also  ‘Toppy’ markets destined for correction

Leave a Reply

Your email address will not be published. Required fields are marked *