There are dozens of broad and individual commodities exchange traded funds on the market today, some of which are “old” by industry standards. One way of interpreting that is the commodities ETF space could use some refreshing.
Enter the VanEck CMCI Commodity Strategy ETF (CMCI), which debuted last week. The newly minted ETF, which follows the UBS Constant Maturity Commodity Total Return Index, could be immediately pertinent to advisors and commodities investors because it attempts to solve two of the issues market participants face with old-guard commodities ETFs.
Those are negative roll yield and lack of diversification. To the point about diversification, many traditional commodities ETFs that are supposedly broad are, in reality, heavily allocated to various gold and crude oil futures contracts. To its credit, CMCI lives up to its billing as a more diverse commodities fund, featuring exposure to nearly 30 individual commodities across five commodities sub-groups. In order of weight in the new ETF, those are energy, agriculture, industrial metals, precious metals, and livestock.
CMCI Combats Negative Roll Yield
As noted above, another issue market participants contend with in futures-based commodities ETFs is roll yield. Indeed, there are instances in which roll yield is positive. Those occur when the contracts being sold by a fund sport higher prices than those that are being rolled into.
On the flip side, a negative roll yield can deteriorate an investor’s return in a scenario when prices for longer-term contracts are higher than they are for expiring contracts,” according to VanEck research. “Commodities in this scenario are considered in ‘backwardation.’ Many commodities often trade in a state of backwardation, which can detract from overall investor return, particularly in strategies, index-based or active, that regularly roll expiring contracts to the next available contract at the front of the futures curve.”
The more a commodities ETF’s components trade in backwardation, and some due regularly, the more investor returns become vulnerable to the downside. CMCI’s underlying index takes steps to ameliorate that situation and the difference has been materially positive. Over the long term, the UBS Constant Maturity Commodity has beaten the Bloomberg Commodity Index and the S&P GSCI by wide margins.
“The UBS Constant Maturity Commodity Index targets commodity futures positions along the maturity curve for each commodity component and repositions exposure daily to maintain a constant exposure to a target maturity over time. This has allowed the Index to mitigate the long-term effects of negative roll yield on its return profile historically,” concluded VanEck.
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