Standard Bank Group has launched its Africa commodity exchange traded note (ETN) based on the developed Standard Bank Africa Commodity Index. The commodity ETN, which is listed on the Johannesburg Securities Exchange, will give investors access to the underlying Africa Commodity Index and with that the performance of four commodity sub-sectors, namely base metals, precious metals, energy and agriculture.
Retail and institutional investors in the Africa Commodity Index ETN will have direct access to the performance of aluminium, copper, gold, platinum, crude oil, corn and wheat. The commodities in the Africa Commodity Index are weighted according to their African production levels over the past five years.
Commodities have been one of the major driving forces behind African economic growth and the Africa Commodity Exchange Traded Note capitalises on the growing global demand for commodities.
Commodities have been recognised in recent years as an asset class endowed with unique features, providing an interesting ingredient to ensure a diversified financial portfolio. The principal benefits of adding commodity exposure to a portfolio are:
• Commodity markets trade globally, offering distinct advantages in liquidity and the free flow of commodity information.
• Commodity returns generally exhibit negative correlation with returns from traditional asset classes such as equities and bonds.
• Low or negative correlation across commodity sectors provides further diversification benefits.
• Commodity returns are sometimes found to have a positive correlationwith inflation, hence providing a natural inflationary hedge.
Johann Erasmus, Standard Bank Group's Director of the Global Structuring Group, says: "Exchange traded notes have really given us the opportunity to provide our retail andinstitutional clients with access to markets and products that they have nothad access to in the past. While the ETN and ETF market in South Africa is largely still in its infancy, we have seen tremendous growth in other markets. The global ETF/ETN market is worth an estimated USD 1,542 billion with 7,610 listings world wide as at March 2011".
"In South Africa we have seen a steady increased interest in passive investment products, which has lead to a host of new ETNs being listed on the JSE. Most of theseprovide investors cost effective access to securities or indices which historically were difficult to access, or required that investors access the underlying security in the international market."
Historical back testing carried out by Standard Bank Group's research department shows high correlation levels between the Standard Bank Africa Commodity Index and South African inflation, with housing and utilities, food and non alcoholic beverages and transport making up large portions of the inflation basket, all which have a base derived from commodities.
Mr Erasmus says: "Passive products like ETNs are different from active managed portfolios in that they don't outperform the benchmarks, but they will always guarantee the performance of the benchmark underlying regardless of the economic environment. This is the reason that they are attractive investments. Additional benefits are their low costs, liquidity and depending on the benchmark, provide investors entry to otherwise hard to access securities."
The Standard Bank Africa Commodity Index ETN is the 10th ETN launched by Standard Bank reflecting the Bank's strong presence in the local ETN market. The launch of the Commodity Index ETN follows the successful launch of a suit of single commodity ETNs as well as the Standard Bank Africa Equity Index ETN.
As at end of July 2011, the respective year to date performance of the longer listed ETNs were silver: 32.83%; platinum: 4.76%; palladium: 3.75%; and gold: 15.96%.
See Standard Bank Online Share trading on www.standardbank.co.za.