The anticipation surrounding the U.SFederal Reserve's interest rate cuts has undeniably shifted market dynamics, sparking a substantial rise in the performance of commodity-focused funds during the first half of the yearHowever, this expectation for lower interest rates often coincides with the looming shadow of an economic recession, ushering in potential risks that investors must remain vigilant about.

Among various investment vehicles, commodity funds have emerged as noteworthy highlights in the public fund landscape over these past six monthsData from East Money Choice reveals that these funds have collectively generated close to 5 billion yuan in income for their investors, achieving an impressive overall return rate exceeding 10%. Out of the eighteen products available, only one recorded a negative return, while sixteen managed to surpass the 12% mark, indicating a robust performance compared to their benchmarks.

Notably, even though Bridgewater Associates (China) sharply reduced its holdings in gold ETFs during this time, significant interest from other Chinese investors—such as private equity funds and state-owned enterprises—has led to a remarkable expansion in the scale of commodity-focused funds

By the end of the first half of the year, these funds witnessed a staggering 72% year-on-year increase in assets under management.

Various fund managers have pinpointed the dual influences of anticipated Fed interest rate cuts and supply-demand factors as key contributors to this sector's strong performanceNonetheless, they also caution against complacency, as the correlation between interest rate cuts and recessionary fears can introduce considerable market volatility.

Examining the numbers more closely, commodity funds in the first half of the year yielded an aggregate profit of approximately 4.783 billion yuanWhen factoring in the average scale of these funds both at the beginning and the midpoint of the year (about 43.81 billion yuan), the estimated overall return rate climbs to 10.92%. The star performer among these funds was a silver-linked LOF (Listed Open-Ended Fund) that tracked the Shanghai Silver Index, posting an impressive return of 23.87%.

Following closely behind, seven ETFs linked to gold flourished as well, generating returns ranging from 14.12% to 14.41%. Further down the line, seven ETFs tracking the Shanghai Gold Index recorded returns between 13.40% and 13.78%. In stark contrast, the soymeal ETF, which tracks the Dalian Commodity Exchange, faced a downslide with a return of -0.79%.

Breaking it down by quarter, the first quarter proved more lucrative for commodity-focused funds, generating approximately 3.091 billion yuan—accounting for around 65% of the total earnings for the semester

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Interestingly, a distinct divergence surfaced between gold and non-gold funds; gold ETFs excelled in the first quarter while silver LOFs, metal ETFs, and energy and chemical ETFs showed stronger performance in the second quarter.

As an example, the gold index enjoyed a 14.66% overall increase for the first half of the year, with the first quarter alone generating a 10.00% rise that outperformed the subsequent quarter by 5.77 percentage pointsXu Zhi-Yan, manager of the Hua An Gold ETF, highlighted four main drivers of this positive performance: firstly, the expected commencement of a rate-cutting cycle in the second half of the year and its favorable impact on gold amid a global monetary environment; secondly, continued accumulation of gold by central banks, enhancing demand resilience compared to previous years; thirdly, ongoing geopolitical tensions lend gold an essential role in asset allocation; and finally, a heightened trading sentiment reflected in speculative positions in gold futures at the COMEX (New York Mercantile Exchange).

For the indices related to silver and other commodities, most experienced both significant and positive fluctuations throughout the period, with the Shanghai Silver Index soaring by 26.74%. In comparison, the non-edible soymeal index dipped down by 1.24% but rebounded in the second quarter

These trends reveal not only a broadening performance range for various commodity indices but also an undercurrent of unavoidable volatility that investors must navigate.

A report by fund managers Zhao Jian and Li Shao emphasized the considerable influence of the Fed’s interest rate expectations on the commodities marketThis reflects the broader implications of monetary policy on commodities and asset allocations more generally, with a focus on potential future yield prospects in a period characterized by uncertainty.

The historical data underscores the competitive and variable nature of these commodities; from 2019 through 2023, commodity funds have yielded significant returns, aside from a downturn in 2021—accumulating over 9.314 billion yuan in total returns over five years

Adding the first half of 2024, the returns surge to an impressive 14.097 billion yuan.

It's imperative to note that growth patterns among different types of commodity funds showcase varying rhythmsFor instance, in 2019, while the soymeal ETF had losses, the gold and metal ETFs reported gainsIn 2020, the reverse transpired as the energy and chemical ETF faced losses while other funds thrived.

This ongoing assurance of returns within commodity funds underpins their gradual expansion, highlighted through data which portrays a 72.4% increase in scale, reaching approximately 55.454 billion yuan by the midpoint of the year, and a growth of over 44.24 billion shares, marking a 51.36% rise in scope.

Amongst five classes, gold ETFs demonstrated the most substantial increase in shares, surpassing by nearly 3.293 billion units, followed closely by silver LOFs and soymeal ETFs

Conversely, energy and chemical ETFs saw a decline.

In examining the demographics of investors, individual interest in purchasing these funds has outpaced institutional investors, with individual holdings comprising 55.10% of the commodity fund ownership by the end of the first half, an increase of nearly 3 percentage points since the year's outsetParticipation surged particularly among individual investors in non-ferrous metal ETFs, rising significantly over the same period.

Interestingly, while substantial sales occurred from Bridgewater Associates regarding gold ETFs, other institutional players, such as private equity funds and state-owned enterprises, were keen on acquiring more shares, thereby offsetting the exited volume, which reflects persistent institutional interest in gold as a secure investment.

Nevertheless, historical insights indicate that investor enthusiasm may not always align with market rhythm

In both 2021 and 2022, we observed substantial shifts where the former year resulted in the most extensive declines in fund assets due to excessive buying despite a market downturn, contributing to poorly timed exits in the subsequent year.

As for future investment opportunities, the outlook remains optimistic, particularly regarding gold’s mid-to-long-term strategic value amidst expected declines in U.Streasury yields and heightened asset volatilityFund managers express similar sentiments, indicating burgeoning allocative potential for precious metals, including silver, which contrary to recent trends has shown robust performance and consistent demand.

For soymeal and other sectors, navigating associated risks will require astute attention to external factors, particularly those affecting agricultural outputs