Commodity financialization and sector ETFs: Evidence from crude oil futures |
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Institution: | 1. Analytics Fellow at McKinsey & Company in Beijing, China;2. Department of Agricultural Economics, Texas A&M University, College Station, TX, United States;3. Department of Finance, Insurance, and Real Estate, Faculty of Business Administration, Université Laval, Canada |
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Abstract: | We investigate the diversification benefits of energy assets in the setting of commodity financialization using data on crude oil futures and Sector ETFs (SPDRs). Correlations between commodities and financial assets increased during the post-Commodity Futures Modernization Act (CFMA)/commodity bull cycle period, resulting in lower benefits of diversification. However, we find that conditional correlations between crude oil futures and sector ETFs meaningfully increased only since the 2008–09 financial crisis. The results therefore suggest that the financial crisis, rather than CFMA regulation, explains changes in the diversification benefits of commodities. Moreover, we find that oil futures returns are less correlated with SPDRs than with the S&P index. Thus, energy futures, and crude oil in particular, offer the potential for diversification benefits in sector-style investing. |
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Keywords: | Futures Commodities ETF SPDR Sector Industry Correlation DCC Time-varying Conditional Financialization Diversification |
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