Commodity ETF providers aim for green niche

Gold can be green — as can silver, copper, nickel and even lead used in batteries. And ETF managers are hoping investors interested in sustainability and clean energy development will take a shine to some new commodity ETFs.

In the past six weeks, two gold ETFs have hit the market that are focused on more environmentally and socially conscious resource extraction. Sprott Asset Management’s ESG Gold ETF, which launched two weeks ago, sources its gold from miners meeting its own ESG screening criteria, fund filings show. And Franklin Templeton’s Responsibly Sourced Gold ETF, which debuted at the end of June, holds gold bars that meet the London Bullion Market Association’s ethics and environmental criteria.

Some shops’ ESG assessments also factor in whether the commodities they invest in are used in the production of clean energy equipment.

Last month, Harbor Capital launched its Energy Transition Strategy ETF, which invests in futures of the commodities used in the making of solar panels, wind turbines and batteries, as well as cleaner fossil fuels such as natural gas and carbon credits. The $21mn Invesco Electric Vehicle Metals Commodity Strategy No K-1 ETF, which launched in April, and the two-year-old $1.1bn KraneShares Global Carbon Strategy ETF take a similar approach.

In many ways, the slicing and dicing of commodities into ETFs targeting specific themes follows the same product development curve of ETFs in other asset classes, said Todd Sohn, technical strategist at institutional research firm Strategas.

“Equity ETFs pretty much have all of the asset classes covered — even single stocks — and now fixed income is seeing the same,” he said. “It’s in the nascent stages when it comes to commodities.”

There were only 122 commodity ETFs listed in the US as of the end of July, compared with more than 1,700 equity ETFs and more than 500 fixed-income strategies, according to Morningstar Direct data.

The commodity ETF space is currently dominated by established funds, such as the $57.3bn SPDR Gold Trust and the $3.6bn Invesco DB Commodity Index Tracking Fund. But providers of ESG — or sustainability-themed commodity products say they are providing choice and more specificity in how investors allocate to commodities.

“Our goal is to answer a number of key questions for investors: where does my gold come from, who produced it and was it produced sustainably by recognised ESG leaders?” Sprott chief executive John Ciampaglia said in a press release issued this month. Through its partnership with groups such as the Royal Canadian Mint and individual miners, “Sprott is uniquely positioned to offer a convenient way for investors to own physical gold that aligns with their ESG values,” Ciampaglia said.

While not explicitly an ESG strategy, Harbor’s Energy Transition Strategy gives investors a way to invest in commodities that meets their social goals and captures what the firm sees as a multi-decade transformation of the energy market, said Ross Frankenfield, managing director and investment strategist at the Chicago-based group.

“There’s going to be trillions of dollars of investment, and a lot of that is relatively unknown, in the sense of which companies will see that benefit,” Frankenfield said. “But the building blocks facilitating that transition, the metals and minerals, that is largely known and that is why we are investing in the building blocks versus the equities.”

And, unlike thematic strategies focused on stocks, commodity-based clean energy ETFs have the potential to give investors a return profile that does not closely correlate with stocks or bonds, Strategas’s Sohn notes. “But you’re exposing yourself to more macro risks,” he said, like geopolitical instability. “You have to be prepared for the ups and downs,” he added.

Commodity ETFs this year have benefited from the general rise in agricultural and energy goods, amassing $8.8bn in new investments year-to-date through July, according to State Street Global Advisors, even though investors pulled $6bn from the ETFs in July. State Street attributes last month’s outflows to profit-taking, noting that the asset class was up 4.1 per cent in the month.

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