Despite Austerity Fears, Soaring... Commodity ETFs Draw Attention

[Asia Economy Reporter Junho Hwang] Despite domestic and international stock market instability, the returns of global commodity exchange-traded funds (ETFs) listed on the KOSPI are soaring. The outlook for the second half of this year is also bright, drawing the attention of investors struggling in a tightening market.

According to the Korea Exchange on the 11th, the top-performing ETFs listed domestically compared to the end of last year were all commodity-related ETFs. The KODEX US S&P Energy ETF recorded a return of 45.04%, followed by TIGER Oil Futures Enhanced (43.36%), KBSTAR US S&P Oil Producers (31.60%), and KODEX 3 Major Agricultural Futures (28.77%) among the top-performing ETFs.

Considering that the KOSPI fell to the 2500 level on the 10th, these returns are remarkable. They also show significant growth compared to ETFs like ‘TIGER China Electric Vehicle SOLACTIVE (-31.49%)’, which grew to a net asset size of 3 trillion KRW last year and became a leading ETF, or TIGER US Tech TOP10 INDXX (-21.00%) with a net asset size of 1 trillion KRW.

This expansion in returns is analyzed as a result of inflation intensification caused by the Russia-Ukraine war benefiting commodity prices. The outlook remains positive. Due to the war's aftermath, substitution within commodity groups such as crude oil-coal and copper-aluminum is occurring, but even substitutes are scarce, causing prices to rise across commodities. Additionally, some commodities are used in the production of other commodities, which may lead to a chain reaction of price increases. For example, Russia’s extension of export quotas on nitrogen fertilizer until next spring is driving fertilizer prices up, further fueling the rise in agricultural product prices.

The rising US dollar is also expected not to suppress commodity price increases. Since commodities are mainly traded in dollars, commodity prices and the dollar typically move inversely, but due to strong commodity demand, a decoupling from the tightening dollar trend is occurring. However, the Chinese economy, which holds significant weight in commodity demand, is likely to experience slowed growth due to lockdown effects, potentially weakening real commodity demand somewhat.

Seungjin Park, a researcher at Hana Financial Investment, stated, "Even if oil production increases, it is unlikely to fully replace Russia’s supply," adding, "The ‘butterfly effect’ related to commodity prices has not even begun yet."