On August 24, 2015, also known as “Black Monday”, commodity prices fell because of economic concerns in China. China consumes approximately half of the world’s iron ore, 48% of its aluminum, 46% of its zinc and 45% of its copper. Not to mention tons of global oil.
Below, we take a look at which commodities ETFs suffered the most on Black Monday, and how they’ve performed since then.
Structural Flaws in the ETF System
The ETF industry has grown from $305 billion to $2 trillion in ten years. Investors have rotated into the ETF asset class because of its increased liquidity, low rates, and broad exposures. Global events, like Black Monday, have raised concerns, with ETF investors citing liquidity concerns when exiting an ETF during times of crisis.
Commodity ETFs continually “roll” futures positions in order to gain exposure to commodities markets. Because these funds have to buy and sell on a systematic basis, many times they are buying high when futures markets are speculating about spot prices, and selling low when the price moves back towards the spot price.
During the quick crisis on Black Monday, there were many ETFs that traded at values far below the collective value of their assets. The deviation in underlying asset value and ETF value stemmed from ETF market makers, who facilitate the day-to-day trading of ETFs, expanding ETF spreads. Many ETFs halted trading, and most returned to normal values within an hour.
How ETFs Fared
ETFs are a massive part of the global financial markets, and we wanted to do a little research to see if the concerns about ETFs had merit for retail investors. Our research suggests that ETFs held up fine, even in the face of a global crisis in China. The below commodity-driven ETFs all fell from their August 21 close on global concerns of a Chinese economic slowdown, but, a week later all of the commodity ETFs had recovered and increased their values from their August 21 close prices.
Market Vectors Steel Index ETF Fund (SLX)
- August 21, 2015, Close: $24.54
- August 24, 2015, Open: $22.71
- August 31, 2015, Open: $24.83
Dow Jones-UBS Aluminum Total Returns Sub-Index ETN (JJU)
- August 21, 2015, Close: $14.40
- August 24, 2015, Open: $14.00
- August 31, 2015, Open: $15.48
Powershares DB Base Metals Fund (33% zinc) (DBB)
- August 21, 2015, Close: $12.80
- August 24, 2015, Open: $12.38
- August 31, 2015, Open: $13.13
DJ-UBS Copper Total Returns Sub-Index ETN (JJC)
- August 21, 2015, Close: $26.88
- August 24, 2015, Open: $25.81
- August 31, 2015, Open: $27.46
United States Oil Fund (USO)
- August 21, 2015, Close: $13.23
- August 24, 2015, Open: $12.62
- August 31, 2015, Open: $15.89
The Bottom Line
These findings suggest that the structural flaws in ETFs are less dangerous to retail investors, who usually trade on longer time frames, and more dangerous for institutional investors who trade at higher frequencies. We do note, that the concerns surrounding ETFs are valid and that retail investors should always use limit buy and limit sell orders to ensure that their shares will be executed at attractive prices.
Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net