ETF Stream: Wine – Too Illiquid for ETFs?

(Oct. 26, 2023) – While the history of investing in wine can be traced back to the 1700s, the illiquid nature of the asset class means it has yet to be created in exchange-traded product (ETP) format.

Fine wine investing first came to prominence in the 1970s when investors started to actively trade the commodity, especially in the US.

What excited investors in particular was the prospect of a fine wine’s value increasing over time, especially given potential tighter market conditions due to factors such as consumption rates.

Furthermore, the commodity has a low correlation to traditional asset classes, making it attractive to multi-asset investors.

Ollie Wilkinson, a member of the sales and purchasing team at Wilkinson Vintners, a stockholder and supplier of fine wines, told ETF Stream: “Wine is a well-established alternative asset class and has often been turned to in times of increasing market turbulence as it has little correlation to other asset classes.

“Steady consumption of fine wines also creates a natural demand-supply imbalance.”

“It comes down to convenience,” Callum Woodcock, founder of Winefi, a recently-launched fintech wine investment platform, added. “Wine is a long-term investment, and to invest directly, you are looking at £25,000 or more to build a diversified portfolio. Unless you are passionate about the underlying assets themselves, that cost and time horizon can be off-putting.”

Despite Liv-ex creating a number of indices to track the ballooning fine wine industry, issuers are yet to view this commodity as a viable asset to track via the ETF wrapper.

This is because any vehicle that offers daily liquidity to an illiquid asset such as fine wine is likely to run into issues, especially when underlying trading dries up.

For example, mutual funds will gate in response to their inability to meet potential redemption orders.

Because ETFs trade on the secondary market – similar to investment trusts – they will likely trade at wide discounts to net asset value (NAV) as authorised participants (APs) are unable to meet redemption demand.

“It is a liquidity issue,” Woodcock explained. “Wine is, ironically, a relatively illiquid asset. If markets are volatile and you want to redeem your investment, you will need to sell at a discount to realise that cash flow quickly.”

While the beauty of the ETF creation-redemption mechanism means investors will be able to redeem their assets, in illiquid markets such as fine wine, discounts to net-asset value (NAV) risk becoming extremely wide during periods of market stress.