HardAssetsInvestor

Written by Lara Crigger  |

June 18, 2010

Pat Chiefalo: Commodity ETFs Come Of Age In Canada

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National Bank Financial's director of derivatives shares his outlook on the ETF landscape north of the border.

When it comes to the future of commodity ETFs, we need look no further than north of the border. Canada's burgeoning ETF marketplace already offers dozens of products not yet available stateside, including oil sands plays, spread ETFs and global infrastructure funds. And there's more to come, says Pat Chiefalo, director of derivatives and structured products for Canada's National Bank Financial.

At National Bank Financial, Chiefalo applies institutional-level analysis to retail products, including ETFs and other commodity products. Before joining the firm, he worked at Merrill Lynch's derivatives desk in Toronto, covering institutional accounts.

Recently, HAI Associate Editor Lara Crigger spoke with Chiefalo about the commodity ETF landscape in Canada, including who's the biggest name in TSX ETFs, why the spread ETF makes sense and where he sees Canadian commodity ETFs going next.

Crigger: Let's give our readers some perspective of what the Canadian commodity ETF marketplace looks like. Who are the dominant players in that space? What are the biggest ETFs?

Chiefalo: The balance of the funds in Canada, excepting a few outliers, is really driven by Horizons BetaPro. They offer a whole suite of individual commodity funds, whether it's natural gas, oil, silver and so on, as well as single-long, double-long, inverse, etc.-type funds. Those are extremely heavily traded in Canada, and they're used in both institutional and retail accounts.

Like in the U.S., a couple of the largest ETFs are in gold. iShares has one of the largest funds tied to physical gold. And Claymore recently converted a closed-end physical gold fund into an ETF structure. Those are the only two ETFs we have in Canada that hold physical gold, but they're two of the largest ones we have.

In terms of overall asset value, commodity ETFs are about 15 percent of the market here in Canada, which is disproportionately above what you'd see in other regions. And that figure includes ETNs, grantor trusts and so on, although some of that market share does come from funds listed in U.S.

Crigger: Is the investor emphasis on commodities simply a reflection of Canada's resource-heavy equity markets?

Chiefalo: Yes, that's right. Our equity market is heavily weighted toward resources, and we have a lot of natural resources and mining companies. So both on the institutional and the retail side, a lot of investors already have background knowledge on many commodities. And now that they have the opportunity to dive in and play the actual commodities, we find that they're pretty active in them, whether it's for speculative purposes or for hedging against equity.

Crigger: The Canadian marketplace provides some very interesting plays that we in the U.S., the largest ETF market, don't. For example, there are the Horizons BetaPro Winter-Term ETFs. These products claim to help mitigate contango in the natural gas and oil markets - how do they do so?

Chiefalo: As we know, a lot of front-month futures products do have a lot of exposure and risk to contango during rollover. We've seen these effects on some U.S. ETFs, and we've also seen them in Canada as well. So the next generation of single-commodity ETFs is trying to find better spots along the curve to play the specific commodity, so as to minimize the effects of contango. It's probably tough to eliminate it completely. But you can minimize it by going a little further out on the curve, purchasing further-dated futures contracts and rolling them less frequently.

The Horizons BetaPro Winter-Term ETFs purchase the December contract in natural gas and roll their contracts every June. Now, we've done some analysis comparing the spot price of NYMEX crude oil over 2009 versus what a simple front-month ETF like USO would do, versus the BetaPro product. And we did see a pickup in performance from the BetaPro product, driven by that better contract selection along the curve.