Oil, metals ETFs soar on Ukraine war, sanctions on Russia

The price of global commodities and sharemarket-listed exchange-traded funds (ETFs) that track their prices are surging as the sanctions on Russia continue to mount.

Oil, gold, palladium and other metals, including nickel, are trading at close to record highs.

It is not only oil prices that have surged response to war in Ukraine. Gold and particularly palladium prices have also surged, lifting the returns of exchange-traded funds that track their pricesCredit:Louie Douvis

The trade and financial sanctions imposed on Russia and the associated likely disruptions to global supply of commodities are behind the big price jumps.

Despite the price of a barrel of Brent Crude posting its biggest one-day slump in almost two years this week, it is still changing hands for about US$110 (A$150) a barrel. Two days earlier, it hit a 14-year high of US$139 (A$190).

Global oil prices have soared more than 30 per cent since the war in Ukraine began. Russia provides about 10 per cent of the global supply, prompting fears of a shortage.

Organisation of the Petroleum Exporting Countries have given no real indication that they will increase oil output to meet the extra demand.

‘Any single commodity is highly volatile up and down. What’s gone up a lot can also go down a lot.’

Among ETFs listed on the Australian Securities Exchange that are seeing big gains is the BetaShares Crude Oil Index ETF, with a return of almost 50 per cent since the start of the year.

Units in ETFs are easy to buy and sell on sharemarkets and can provide broad-based returns across entire markets.

Many simply track overall market performance, whether that be a benchmark sharemarket index, sub-index or the price of a particular commodity or precious metal, such as gold.

The prices of many other commodities have also surged on the supply disruption threat.

The price of palladium – used in car catalytic converters, jewellery and even dental fillings – has surged almost 50 per cent since the start of the year. Russia produced 40 per cent of all global palladium supply in 2021.

The ETFS Physical Palladium ETF has produced a 5-year average annual compound return of 31 per cent and is up almost 50 per cent since the start of the year.

The price of nickel, used extensively in electric car batteries, is up about 30 per cent in a month.

The price of gold – regarded as a safe haven for investors in troubled times – hit more than US$1990 (A$2700) and ounce this week as investors bought the yellow metal as a hedge against inflation and geopolitical uncertainty in Europe.

The ETFS Physical GOLD ETF has returned almost 8 per cent since the start of this year, and an annual average compound return of 10.7 per cent over the past five years.

However, it has not all been upside for ETF investors.

European shares have dived because of the Ukraine crisis and the ETFS EURO STOXX 50 ETF, which tracks the 50-largest European shares by market capitalisation, is down about 14 per cent.

Investors tempted to take advantage of soaring commodity prices should take note that the sectors are unstable, says Tim Murphy, Morningstar’s director of manager selection.

“Any single commodity is highly volatile up and down. What’s gone up a lot can also go down a lot. If you’re going to invest in these things, make them a small part of your [investment] portfolio,” Murphy says.

Kanish Chugh, head of distribution at ETF Securities, says the volumes of trading of units in its gold and palladium ETFs are up significantly this year. That includes not only investors buying units in the ETFs, but many who are selling and taking profits.

Chugh says many investors decide to take profits and rebalance their portfolios once a particular ETF has had a good run.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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