Commodity Exchange-traded Funds Research Articles

Examining the asymmetries between equity and commodity ETFs during COVID-19

Previous studies have neither examined the volatility co-movements across stock and commodity markets in terms of both time and frequency nor differentiated between bad and good volatility and the potential asymmetric effect. To address this gap, we computed 5-min price data, the positive and negative semivariances on five leading Exchange Traded Funds (ETFs) covering the US equity market, crude oil, natural gas, gold, and silver markets from January 2, 2019 to May 29, 2020, and then draw on the wavelet coherency methodology and the time-varying wavelet coherence measure. The results show that the negative realized volatility co-movements are stronger during the COVID-19 outbreak, especially at short and medium frequencies. The US stock market leads energy and precious metals in the short-run frequency. However, over the long-run, the lead-lag pattern mostly alternates over time for all cases. Notably, the realized volatilities of US equities and precious metals are shaped by the COVID-19 outbreak, reflecting the quest of investors for protection from the market volatilities by investing in gold and silver. This latest finding is confirmed by the wavelet coherence measure. Further results show asymmetric co-movements emanating especially from realized negative semivariance of equities and energy markets around the pandemic outbreak across short-time horizons. We also notice that the COVID-19 outbreak increases the procyclical movement of all ETFs in the short-term. The effect is more pronounced among the US equity and precious metals markets, whereas no significant countercyclical connectedness is observed among these markets. Our findings support previous evidence showing that gold and silver can serve as safe-haven assets due to their low coherence with risky assets.

Intraday return predictability: Evidence from commodity ETFs and their related volatility indices

Using high-frequency data of crude oil, gold, and silver exchange-traded funds (ETFs) and their related volatility indices, we analyse patterns of intraday return predictability, also called intraday momentum, in each market. We find that intraday return predictability exists in all the markets, but the patterns of predictability differ for each market, with different half-hour returns, not necessarily the first half-hour returns of the trading day, exhibiting significant predictability for their last half-hour counterparts, depending on the specific market. The intraday return predictability is stronger on days of higher volatility and larger jumps. Substantial economic value can be generated by a market timing strategy which is constructed upon the intraday momentum, in all the markets under study. Possible theoretical explanations for the intraday return predictability are infrequent portfolio rebalancing investors and late-informed investors.

Testing the Tracking Efficiency of Commodity Exchange Traded Funds (ETFs) across the Bearish and Bullish Market Regimes: Evidence from Indian Gold ETFs

ABSTRACTCommodity exchange traded funds (ETFs) help investors gain exposure to the underlying commodity in digital form. The present article attempts to examine the performance characteristics of 12 gold ETFs in India across the bear and bull markets. ETFs’ sensitivity to their underlying asset (gold prices) is observed to be lower during the bearish market regime, and, as such, the tracking error is found to be higher during the bearish market regime. Further, volume is reported to bear a significant positive impact on the tracking ability of ETFs whereas volatility and pricing deviation are found to negatively impact the tracking ability of ETFs.

The Relation between Return and Volatility in ETFs Traded in Borsa Istanbul : Is There Any Difference between Islamic and Conventional ETFs ?

In this study, we aim to analyze the relation between return and volatility in different types of exchange-traded funds (ETFs) traded in the Borsa Istanbul. The types we examine are Islamic stock index, conventional stock index, bond, commodity, and U.S. dollar ETFs. We employ the following battery of causality analysis methods that have different statistical advantages to each other: Toda-Yamamoto (1995); bootstrap based Hatemi-J (2005); volatility spillover, which allows investigating causality in variance; frequency domain, which decomposes causality due to different time frequencies; and asymmetric causality, developed by Hatemi-J, which enables finding causation linkages for different types of shocks in each variable. Although the results obtained from our analyses show that a negative relationship between return and volatility is valid for most ETF types, an asymmetric relation running from negative return shocks to positive volatility shocks is valid for only some conventional stock ETFs and U.S. dollar ETFs. On the other hand, Islamic ETFs and commodity ETFs have an asymmetric relation running from positive return shocks to negative volatility shocks. Our results show that the hypotheses investigated in this study vary with the ETF type included in the model.

Physical versus Futures-Based Replication: The Case of Commodity ETFs

This article examines various issues concerning the performance of commodity exchange-traded funds (ETFs) by taking into account whether these funds adopt a physical or a synthetic replication technique. The analysis first demonstrates that the physically backed ETFs perform better than their futures-based counterparts but they are riskier than them. Moreover, it is shown that the pricing of commodity ETFs, and especially the pricing of futures-based commodity ETFs, is somehow affected by developments in the equity market. The return of commodity ETFs is further affected by the implied and contemporaneous volatility of equity market as well as daily changes in the exchange rates of USD with such basic currencies as EUR and JPY. The tracking error of commodity ETFs is influenced by these market factors too. Finally, it is revealed that the tracking error of futures-based commodity ETFs is significantly higher than the tracking error of commodity ETFs that invest in the underlying commodities directly. This pattern applies both to bear and bull markets. In addition, the tracking error of the majority of commodity ETFs displays a mean-reverting behavior.

The Relation between Return and Volatility in ETFs Traded in Borsa Istanbul: Is There any Difference between Islamic and Conventional ETFs?

In this study, we aim to analyze the relation between return and volatility in different types of exchange-traded funds (ETFs) traded in the Borsa Istanbul. The types we examine are Islamic stock index, conventional stock index, bond, commodity, and U.S. dollar ETFs. We employ the following battery of causality analysis methods that have different statistical advantages to each other: Toda-Yamamoto (1995); bootstrap based Hatemi-J (2005); volatility spillover, which allows investigating causality in variance; frequency domain, which decomposes causality due to different time frequencies; and asymmetric causality, developed by Hatemi-J, which enables finding causation linkages for different types of shocks in each variable. Although the results obtained from our analyses show that a negative relationship between return and volatility is valid for most ETF types, an asymmetric relation running from negative return shocks to positive volatility shocks is valid for only some conventional stock ETFs and U.S. dollar ETFs. On the other hand, Islamic ETFs and commodity ETFs have an asymmetric relation running from positive return shocks to negative volatility shocks. Our results show that the hypotheses investigated in this study vary with the ETF type included in the model.

Cross-Market Investor Sentiment in Commodity Exchange-Traded Funds

Abstract/Zusammenfassung This study shows how the investor sentiment in the stock market affects prices of commodity exchange-traded funds (ETFs). The study provides quantitative evidence that the tracking errors of commodity ETFs differ in the bullish versus the bearish stock market, and the aggregate tracking error of commodity ETFs is sensitive to the well-known sentiment measures. The study exploits a profitable trading strategy based on investor sentiment in the stock market and commodity market. The sentiment-driven demand for commodity ETFs could exist even after consideration of trading costs, and it is a short-term phenomenon. This unique evidence indicates investor sentiment affects asset valuation across markets. Anleger-Sentiment bei Rohstoff-Exchange-Traded-Funds auf verschiedenen Markten Diese Studie zeigt, wie sich Sentiment-Faktoren am Aktienmarkt auf die Preise von Rohstoff-Exchange-Traded-Funds (ETFs) auswirken. Die Studie liefert quantitative Evidenz dafur, dass die Tracking Errors von ...

Determinants and Impact of Commodity Price Dynamics

The special issue starts with a paper by Hsiu-Lang Chen which shows how investor sentiment in the stock market affects prices of commodity exchange-traded funds. The paper empirically investigates how daily tracking errors of commodity exchange-traded funds differ between bullish stock markets (measured by positive investor sentiment, i. e. optimism about stocks in general) and bearish stock markets (measured by negative investor sentiment). The paper also provides evidence that the aggregate tracking error of commodity exchange-traded funds reacts to previously created sentiment measures. By considering a profitable longshort investment trading strategy based on investor sentiment in the stock and commodity market, the results show that the sentiment-driven demand for commodity exchange-traded funds could exist even after incorporating trading costs. This is mostly a short-term phenomenon. Overall, the results imply that investor sentiment has effects on asset valuation across markets.

Understanding the Tracking Errors of Commodity Leveraged ETFs

Commodity exchange-traded funds (ETFs) are a significant part of the rapidly growing ETF market. They have become popular in recent years as they provide investors access to a great variety of commodities, ranging from precious metals to building materials, and from oil and gas to agricultural products. In this article, we analyze the tracking performance of commodity leveraged ETFs and discuss the associated trading strategies. It is known that leveraged ETF returns typically deviate from their tracking target over longer holding horizons due to the so-called volatility decay. This motivates us to construct a benchmark process that accounts for the volatility decay, and use it to examine the tracking performance of commodity leveraged ETFs. From empirical data, we find that many commodity leveraged ETFs underperform significantly against the benchmark, and we quantify such a discrepancy via the novel idea of \emph{realized effective fee}. Finally, we consider a number of trading strategies and examine their performance by backtesting with historical price data.

Commodity Exchange-Traded Funds: Observations on Risk Exposure and Performance

This paper compares returns of ETFs holding physical commodities and ETFs holding derivative products to their respective spot commodity returns to identify significant performance differences based on the ETF assets. We regress ETF returns on spot commodity returns to estimate beta and R2 values. We use these Beta and R2 values to evaluate the relationship between the ETFs and their spot prices. We found that the physical ETFs perform more consistently with their spot commodities; these products are more likely to provide the expected risk exposure investors desire. Also this paper performs two mean comparison tests: the first compares the returns of the ETFs with their spot commodities; while the second compares the Sharpe Ratios of the ETFs with the Sharpe Ratios generated by their spot commodities. Our analysis of the Sharpe Ratios found that futures based ETFs have considerable performance divergence from the physical commodity depending on if the futures market is in backwardation or contango. Finally this paper evaluates the performance of the stack and strip methods used by WTI Crude Oil based ETFs. We found that the use of a strip method improved the performance of the WTI Crude Oil ETF when the contango in the futures market became more severe, and eroded performance as the market became flat or backwardated.

Cross-Market Investor Sentiment in Commodity Exchange-Traded Funds

Cross-Market Investor Sentiment in Commodity Exchange-Traded Funds

Abnormal Returns in Gold and Silver Exchange-TradedFunds

Exchange-traded funds (ETFs) are one of the fastest growing areas of financial markets and have significantly changed how investors construct their portfolios. We investigate the price efficiency of six commodity ETFs. Our most significant finding is that GLD (gold) and SLV (silver) have a small, but significant, risk-adjusted return at the 3% and 5% filter level, over a passive buy and hold. We also find that commodity EFTS have a low correlation with the S&P 500 and add to portfolio diversification.