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BNP Paribas has rolled out eight new exchange-traded commodities on Deutsche Börse’s Xetra and Frankfurt exchanges.
The ETCs track indices from the Rogers International Commodity Enhanced Indices family, giving investors access to the performance of industrial and precious metals as well as to the energy sector.
The index family was originally created by American businessman and investor Jim Rogers, whose pioneering index, the Rogers International Commodity Index, was designed to meet the need for consistent investing in commodities through a broad-based international vehicle.
Due to the low correlation of commodities with other major asset classes, the ETCs may suit investors looking to diversify their portfolios. The addition of commodities to a traditional stock/bond portfolio has historically made portfolios more ‘efficient’ by enhancing return for each level of risk.
Built into each ETC is a currency hedge which mitigates the risk of adverse currency movements between the US dollar and the euro from impacting performance.
The indices follow the performance of futures contracts with varying maturities. By utilising futures to obtain exposure, investors are able to avoid the storage and transportation costs associated with direct physical investment in a commodity.
The limited maturity of futures contracts requires that soon-to-expire contracts be sold and the proceeds reinvested into futures contracts with an expiry date further in the future. This process is known as rolling over the contract.
Traditional passive investments tracking commodity indices gain exposure via investment in the nearest dated futures contract or front month contract. This strategy has recently shown its limits with steep contango curves (where the forward price of the front month contract is trading well above the spot price). Investors may realise a negative roll return as they sell their cheaper contracts to buy more expensive ones.
The Rogers commodity indices attempt to navigate this issue by ‘optimising’ their rollover strategy. One such method of doing this is to invest further down the curve, in longer dated contracts where the contango effect is usually less pronounced – the curve is flatter and hence the roll returns less negative over time. By rolling the contracts over less frequently, these strategies minimise the traditionally high compounding costs of monthly rollovers.
Recent research from European ETF provider Source highlights the benefit of adopting an optimised rolling strategy compared to ETFs that strictly invest in front-month futures contracts. (See: Source highlights benefits of roll-optimised “second generation” commodity ETFs)
The Rogers International Commodity Enhanced Indices roll over their contracts twice a year, buying contracts expiring in June or December only. This removes some of the short term risk in a futures based index.
The list of newly-launched BNP Paribas ETCs are listed below:
BNP Paribas EUR Hedged RICI Enhanced Industrial Metals Index ETC (BNQ5)
BNP Paribas EUR Hedged RICI Enhanced Metals Index ETC (BNQ6)
BNP Paribas EUR Hedged RICI Enhanced Energy Index ETC (BNQ4)
BNP Paribas EUR Hedged RICI Enhanced Gas Oil Index ETC (BNQ1)
BNP Paribas EUR Hedged RICI Enhanced Gasoline Index ETC (BNQ2)
BNP Paribas EUR Hedged RICI Enhanced Heating Oil Index ETC (BNQ3)
BNP Paribas EUR Hedged RICI Enhanced WTI Crude Oil Index ETC (BNQY)
BNP Paribas EUR Hedged RICI Enhanced Natural Gas Index ETC (BNQZ)
Each currency-hedged ETC has a total expense ratio of 1.20%.
They will join the BNP Paribas EUR Hedged RICI Enhanced Brent Crude Oil Index ETC (BNQX) which was launched last week.