Price speculators spur buying interest in oil exchange-traded note
9 April 2015

The oil price shock is still reverberating throughout the world, but Standard Bank Group's West Texas Intermediate crude oil tracking exchange-traded note has received a spike in buying interest over the last six weeks as investors try and pick the bottom of the oil market.

According to etfSA research to the end of January, exchange-traded funds (ETFs) that tracked the world and US markets for two years achieved 30% and 31% respectively, while over five years, an industrial tracker achieved 27.67% per annum. The oil ETN, however, lost 47.44% on the year as it tracked one of the worst plunges in oil prices ever.

Johann Erasmus, Standard Bank Group's Head of Global Markets Structuring, says the benefit of the Standard Bank Group exchange-traded note (ETN) is that it tracks West Texas Intermediate (WTI) rather than Brent crude. This makes it more transparent and more liquidly traded.

The note registered a gain of more than 3% on just one day in the middle of February on speculation that US drilling of oil, a major influence of the price destruction since the middle of last year, was dropping.

"Oil has had a massive uptake and there has been an increased amount of demand for our oil ETN. It has grown exponentially for three to four weeks as a lot of investors and speculators try to pick the oil price bottom. We have seen buying and selling on small movements, but also some longer-term investors buying with a longer-term view," he says.

Another driver of interest has been hedging activity by companies against their future fuel obligations as they attempt to lock in the cheaper prices now.

Mr Erasmus says companies are looking to buy the ETN rather than using the futures or forwards market, as they can gain exposure to the full oil and currency price movements without facing contract expiry dates. While the ETN has a downside in terms of a higher capital outlay up front, investors do not have to worry about leverage. "The oil ETN product caters to different classes of users," says Mr Erasmus.

While it is difficult to generalise about the full range of exchange traded products (ETPs) now on offer in South Africa, ETN's in simplistic terms, are similar to ETFs as they are both designed to track an underlying asset, but an ETN is an unsecured debt note normally issued by a bank and an ETF fund holds the asset that it tracks. At last count there were as many as 70 ETPs with about R80bn under management, which include ETFs and ETNs, in South Africa. But questions are being raised about the sustainability of so many products, with some providers finding it harder to achieve enough investable funding.

"Most of them are really small. You have to be very astute about what you do and how you go about it. When you are talking about ETFs, the bulk of assets sit in six or seven funds. My rough estimation is if you have less than R500m in an ETF, you are losing money," says Mr Erasmus.

He says Standard Bank's approach was to start exploring the market in 2010 by launching ETNs, where regulatory approval was fairly straightforward and costs not as high. "We could learn about what works in the market," he says. The bank now has 10 ETN products and has also ventured into the ETF space, with three products across the palladium, gold and platinum commodity baskets.

"We were very targeted in our approach and by the end of last year our platinum and palladium funds had in excess of R8bn in assets under management in nine months - our palladium fund is the second biggest in the world already."

Mr Erasmus expects the stellar growth in assets under management of ETPs to be sustained at close to the 20% mark. "I think it is quite plausible, as about R15bn was added last year.

" He says the market is attracting more investment than alternative fund types, but is still small compared to money inflows to active managers.

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