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3 Commodity ETFs Surging On Russia Sanctions

By Zacks Investment ResearchETFsMar 27, 2014 01:06AM ET
3 Commodity ETFs Surging On Russia Sanctions
By Zacks Investment Research   |  Mar 27, 2014 01:06AM ET
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As Russia took full control over Crimea over the weekend, the situation turned even worse with the U.S. and European Union imposing various tough sanctions against the country. This has raised the possibility of Russia being trapped in recession this year, and likely sometime soon, compelling many rating agencies to downgrade their outlook on Russia.

This is particularly true as the two major rating agencies – Standard & Poor’s and Fitch Ratings – each reduced their credit rating outlook on Russia from stable to negative.

Here are the Russia Sanctions…

The U.S. President has penalized Moscow by freezing personal assets and banning travels for a number of Putin’s allies, as well as forbidding several Russian companies from doing business with U.S. firms. The sanctions have hit hard two Russian banks – Bank Rossiya and SMP Bank – where Visa and MasterCard have stopped their processing service, as well as several wealthy business Russians, who were blacklisted, in the second round of prohibitions by the U.S.

These bans could accelerate further as Obama could punish key sectors of the Russian economy, including its huge energy business, if it continues to destabilize Ukraine.

The European Union also introduced similar types of sanctions like asset freezes and travel bans against a number of Russian officials who are closer allies to Putin. Meanwhile, Japan has also joined the West but imposed moderate sanctions. Japanese Prime Minister Shinzo Abe has halted negotiations with Russia on investment accords, space and military activities as well as relaxing visa requirements.

Market Impact

All these sanctions led to intensified pressure in the emerging Cold War between Russia and the West and could hamper the global economic growth going forward.

Since Russia is an energy-rich nation, Western Europe and other markets are heavily dependent on Russian production to fuel their economies. As such, if geopolitical tension heightens further, it would be a boon for many commodities.

Some commodities are already seeing a strong run-up in their prices over the past few days and the trend is likely to continue in the near term given the continued East-West standoff. Though the U.S. agreed to hold off more economic sanctions until Russia goes beyond Crimea capture, the situation is unlikely to cool off at least in the near term.

As a result, investors could easily tap the surge in commodities by investing in the following ETFs:

ETFS Physical Palladium Shares (PALL)

Palladium is enjoying a huge rally, hitting the highest levels in more than 2 and half years thanks to concerns on potential trade restrictions between Russia and the West. Russia, the top producer of palladium, accounting for nearly 42% of the world supply, might curtail export of the precious metal, thereby adding to supply concerns.  

The palladium market is already witnessing a supply crunch from the eight-week mining closure and labor unrest in the second largest producer South Africa, which makes up for about 37% of the total supply. On the other hand, demand is rising rapidly from the boom in auto industry, and a growing consumption of palladium in cell phones, computers and jewelry. The demand/supply imbalances led to a rise in palladium prices and the pure play ETF in the space.

PALL seeks to match the spot price of palladium, net of fees and expenses. With AUM of $496.2 million, PALL owns palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Bank. The product has an expense ratio of 0.60% and sees moderate volume of more than 72,000 shares a day.

The ETF added about 3% in the last five trading sessions and has room for more upside given the Zacks ETF Rank of 2 or ‘Buy’ rating.

Teucrium Wheat (WEAT)

Agricultural commodity like wheat is also seeing smooth trading over the past several days due to the instability in Ukraine, one of the largest exporters of wheat, which could disrupt the supply from the Black Sea region resulting in a supply crunch. Additionally, adverse weather conditions in the U.S. are adding to production woes. Supply reductions coupled with growing global demand are pushing wheat price higher.  

One way to play this solid trend is with WEAT, which provides exposure to the wheat market in a unique way and reduces the effects of both contango and backwardation. Unlike many commodity ETFs, this product doesn’t just cycle into the next month as expiration approaches, rather it utilizes a much more in-depth approach.

The product uses three futures contracts for wheat, all of which are traded on the CBOT Futures Exchange. The three contracts include the second-to-expire contract, weighted 35%; the third-to-expire contract, weighted 30%; and the contract expiring in the December following the expiration month of the third-to-expire contract weighted 35%.

The fund has amassed $16.5 million in its asset base and sees small volume of around 23,000 shares a day. The product is the high cost choice in the space as it charges annual fee of 2.23%. WEAT gained over 4% in the past five days and has a Zacks ETF Rank of 3 or ’Hold’ rating.

United States Brent Oil Fund LP (BNO)

Although Brent oil gains have been capped by a seasonal slump in demand and sluggish manufacturing data from the world's largest oil consumer, concerns over supply disruptions in Russia, a major supplier of oil and natural gas, and Libya act as major catalysts for the oil price.     

If the crisis escalates further or European Union hits Russia with more sanctions then Russia could freeze European markets out of its vast oil and natural gas supplies. This will result in higher oil prices, pushing Western Europe in search for other markets to meet their energy needs.

Investors could easily take advantage of this situation by playing with BNO, which provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. The fund has amassed $27.8 million in its asset base and trades in light volume of roughly 38,000 shares a day.

The ETF charges 75 bps in annual fees and expenses and is just up 0.21% over the past five trading sessions.

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3 Commodity ETFs Surging On Russia Sanctions

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3 Commodity ETFs Surging On Russia Sanctions

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