Commodity ETFs boosting correlation between raw materials, stocks

The proliferation of commodity-based exchange traded funds has introduced a variety of new investors to the commodity markets, according to Timothy Andriesen, managing director of agriculture and alternative products at CME Group. “Growth has not just been from long-only investors,” he said. “The whole market composition is changing; we're seeing hedge funds and high frequency traders, among others.” Mr. Andriesen was part of a panel at the Morningstar ETF Invest Conference discussing some of the challenges and opportunities that come with investing in commodity-based ETFs. While the ETF market has provided access to a wide variety of commodities, the so-called “financialization” has also led to an increased correlation with equities. “I compare commodities to emerging markets, in terms of correlation,” said K. Geert Rouwenhorst, professor of finance at the Yale School of Management. “As money went into emerging markets that weren't previously correlated, they suddenly became more correlated,” he said. “Now the correlation between emerging and developed markets is 0.8.” In some ways, the same thing is happening in the commodity space, he explained. Even though commodities have historically had a low correlation to stocks, the increased access through ETFs might be changing that. “But we still think there's a reason to spread money around,” Mr. Rouwenhorst said. “As long as the correlation is not one, there are going to be diversification benefits.”