Earlier this week, French banking giant BNP Paribas entered the US ETF arena with the launch of the STREAM S&P Dynamic Roll Global Commodities ETF (BNPC) on the NYSE Arca. The fund has been priced competitively for the US market with a TER of 0.86%.
Managed by the BNP Paribas Quantitative Strategies team and launched under the ‘STREAM ETFs’ brand, BNPC is designed to reflect the return of an investment in a world production-weighted portfolio of commodities and offers investors a convenient and efficient way to gain exposure to a diversified selection of commodities.
The fund tracks the S&P GSCI Dynamic Roll Excess Return Index, a USD-denominated index that reflects the performance of long futures contracts on 24 underlying commodities, diversified across the five main commodity categories – energy, agriculture, industrial metals, precious metals and livestock.
Unlike conventional commodity indices that employ a standard roll schedule, i.e. one that sells the position in the first delivery month and purchases a position of equivalent value in the second delivery month, which can result in a performance drag, the S&P GSCI Dynamic Roll Excess Return Index follows a more sophisticated roll methodology which aims to mitigate the effects of negative roll yield when markets are in contango and take advantage of positive roll yield when markets are in backwardation.
For the uninitiated, a contangoed futures market is one where the prices of certain commodity futures contracts are lower for contracts with shorter-term expirations than for contracts with longer-term expirations. Conversely, a backwardated market is one where the prices of certain commodity futures contracts are higher for contracts with shorter-term expirations than for contracts with longer-term expirations. Rolling into a more expensive contract results in a negative roll yield, while rolling into a cheaper contract result in a positive roll yield.
To overcome and exploit these inherent characteristics of the futures curve, the S&P GSCI Dynamic Roll Excess Return Index first measures the current shape of the futures curve for each commodity at each roll date and then optimises rolling by using a systematic methodology to search for the optimal contract month along the curve to roll into, subject to certain liquidity requirements.
Essentially, when the futures curve for a given commodity is in a general state of contango, the index uses futures contract months that are further out on the futures curve; conversely, when the futures curve for a given commodity is in a general state of backwardation, the index uses nearby futures contracts. Ultimately, this results in superior performance and more accurately reflects changes in the prices of underlying commodities, rather than supply and demand in the futures market.
The underlying commodities the S&P GSCI Dynamic Roll Excess Return Index tracks are Crude Oil, Heating Oil, RBOB Gasoline, Natural Gas, Gasoil, Brent Crude Oil, Chicago Wheat, Kansas City Wheat, Corn, Soybeans, Coffee, Sugar, Cocoa, Cotton, Aluminium, Copper, Zinc, Nickel, Lead, Gold, Silver, Lice Cattle, Feeder Cattle and Lean Hogs.
For UK and Europe-based investors, ETFs from iShares, Lyxor and DB X-trackers offer a similar solution. Indeed, the London-listed iShares S&P GSCI Dynamic Roll Commodity Swap ETF (SDYC), which has a TER of 0.45%, tracks virtually the same index.
There is also the London-listed Lyxor ETF Broad Commodities Optimix TR (OPTM), which tracks the SGI Commodities Optimix TR Index based on similar principles to the S&P GSCI Dynamic Roll Index. The SGI Commodities Optimix TR Index selects, for each of the 24 commodities that comprise the index, the best contract to roll into (i.e. the one that generates the most economical roll yield) taking into account such factors as the shape of the futures curve, seasonality and historical patterns. The roll methodology aims to optimise roll timing in order to ensure liquidity and mitigate market impact. The fund has a TER of 0.35%.
Deutsche Bank’s db Commodity Booster DJ-UBSCI ETF (XCBE) once again follows a similar strategy. XCBE, which is listed on Xetra and Borsa Italiana, tracks the DJ-UBSCI Index and is intended to reflect the performance of 19 commodities, representing four broad commodity sectors, i.e. energy, precious metals, base metals, and agriculture. Like previous indices mentioned, the futures contracts underlying the index are replaced, near expiration, by futures contracts that have a later expiry. To mitigate negative roll yield, the index applies an “optimum yield mechanism” which seeks to maximise the roll benefits in backwardated markets and minimise the losses from rolling in contangoed markets. It achieves this by rolling into the futures contract which generates the maximum implied roll yield, rather than simply the next contract based on a predefined schedule (e.g. monthly). The fund has a TER of 0.95%.