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BNP Paribas has launched two new exchange-traded commodities on Deutsche Börse’s Xetra and Frankfurt exchanges, each providing exposure to the performance of Brent crude oil futures contracts.
The ETCs offer a means of gaining relatively low-cost and convenient tactical exposure to crude oil, allowing investors to express their views on the market.
Additionally, 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 portfolio return for each level of risk.
The BNP Paribas Brent Crude Oil ETC (BNQA), which trades in euros, enables investors to participate in the performance of underlying ICE Brent Crude futures contracts denominated in US dollars. The ETC currently tracks a contract which expires in June 2017 and specifies physical delivery of the crude oil with the option of cash settlement.
The ETC has a total expense ratio (TER) of 0.90%.
The BNP Paribas RICI Enhanced Brent Crude Oil TR Index USD ETC tracks the RICI Enhanced Brent Crude Oil Total Return Index. While the ETC also trades in euros, the reference index comprises Brent Crude oil futures contracts denominated in US dollars.
The RICI 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.
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.
RICI 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)
RICI 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 ETC’s TER is 0.99%.