Traders are going where the action is.
Amid an historic calm in the U.S. equity market, which has provided few opportunities for short-term market participants to ride momentum or cash in on volatility, traders have instead been gravitating toward commodities, where exchange-traded products offering leveraged returns on major assets have seen a surge in interest.
The products — which are considered highly risky, are designed to be one-day holdings, and are principally used by sophisticated, as opposed to retail, traders — have had massive inflows and heavy volume this year, in some cases eclipsing the vanilla commodity funds in popularity.
Take the VelocityShares 3x Long Natural Gas ETN
which aims to provide 300% of the daily return of its underlying asset, natural gas prices. The product, an exchange-traded note, has had inflows of more than $1 billion in 2017, by far the most of any commodity-themed ETP, according to FactSet. To compare, the fund with the second-highest inflows, the iShares Gold Trust
has had about $620 million.
Trading has also spiked. About 223.4 million shares exchanged hands over the month of July, compared with 53.5 million in July 2016, meaning there was a more than four-fold increase in year-over-year activity. This isn’t due to investors chasing performance, necessarily: the product has lost more than 75% of its value thus far this year, alongside a nearly 22% tumble in natural-gas prices.
The fund rose 6.4% on Wednesday and moved on volume of more 18 million shares, well above its 30-day average of 10.3 million.
“Oil and natural gas attract a lot of speculative money and investors, and they’re one of those investments were as the price goes down, people seem to buy more,” said William Rhind, the chief executive officer of Granite Shares, which sponsors broad-based commodity exchange-traded funds like the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF
“A lot of the money that traffics in these leveraged products isn’t from normal investors, but from proprietary trading firms, hedge funds, and other more active traders. They’re used to gain leverage and leveraged exposure on a short-term basis. The inflows indicate people are trying to take advantage of moves, and for natural gas it is a bullish indicator, a sign they expect prices to go up.”
While leveraged commodity products remain a niche category, increased usage has been a broad trend this year. Four of the top 15 commodity ETPs this year, in terms of inflows, are leveraged.
Other ones seeing heightened usage are the VelocityShares 3x Long Crude Oil ETN
, that product’s inverse
— which, on a day when crude oil falls 1%, is designed to rise 3% — and the VelocityShares 3x Long Silver ETN
Thanks to the move into these products, the VelocityShares suite of funds has seen inflows of more than $1.1 billion thus far in 2017, according to Morningstar data. VelocityShares is owned by Janus Henderson
which otherwise saw outflows of $2.3 billion this year. VelocityShares didn’t immediately return a request for a comment on the products.
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Compared with equities, commodities have been extremely volatile this year, and while some of them have posted similar returns to equities — gold is up 11.3% thus far this year, compared with the 10.5% gain of the S&P 500
— the path to those levels has been far rockier. The chart below compares the year-to-date path of the S&P (yellow, in bold) against such major commodities as crude oil
, natural gas, silver and corn. Moves to both the upside and the downside have been far more subdued in stocks, which slowly and quietly grind higher.
To give a measure of how much more action there’s been in commodities, whereas the S&P 500 has only had four sessions this year where it closed with a move of at least 1% in either direction, natural gas has more than 100, including several with a one-day percentage move between 3% and 5%. Crude oil has had nearly 80 such sessions, while gold has had 17.
That’s an atypically quiet market for stocks. The average absolute daily price change for stocks is at its lowest level since 1965, and on Monday, the S&P 500
had its third-narrowest trading range of the past 20 years. The CBOE Volatility index
meanwhile, has been trading near all-time lows.
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Because of this, leveraged equity products have fallen out of favor this year, as even the amplified returns of these slight daily moves haven’t given investors much incentive to take on the additional risk. Among the most popular leveraged ETFs, the ProShares UltraPro S&P 500
, the ProShares Ultra S&P 500
, and the Direxion Daily S&P 500 Bull 3X Shares
have each had year-to-date outflows of about $100 million.