Portfolio Manager and Strategist, Commodities
Macro Outlook: Commodities Hold on to Late 2022 Gains
Commodities pulled back during February as U.S. interest rates rose and the U.S. dollar followed interest rates higher. The U.S. economy has surprised economists with stronger-than-expected growth and stubbornly high inflation. Investors are now expecting higher interest rates for longer periods of time. Considering the shifting interest rate expectations and the stronger U.S. dollar, commodities are still holding onto their late 2022 gains. Most importantly, the UBS Constant Maturity Commodity Index (CMCI) is performing very well versus its peer, the Bloomberg Commodity Index (BCOM). We have always highlighted CMCI’s smarter index construction and roll methodology and this year those differences have driven some strong relative performances so far.
We highlight the importance of the year-to-date estimated roll yield to the overall performance of CMCI. The forward curve in crude oil shifted back to upward sloping or contango in the first three months. The rest of the forward curve remained downward sloping or in backwardation. BCOM recently rolled its crude oil position, losing $0.50. CMCI is positioned on the curve from 3 months to 3 years and continued to generate positive roll yield. Additionally, since BCOM has a defined roll period, the market contango steepened during the roll period by $0.20. CMCI rolls its curve position every day to maintain a constant maturity or forward curve positioning. The smarter index design has allowed CMCI to collect a small amount of positive roll yield every day this year. Year-to-date, CMCI has generated an estimated positive 1.3% roll yield in the energy sector. By contrast, BCOM lost an estimated 2.2% roll yield in the energy sector. We believe that CMCI is a little smarter in design.
Roll Yield Estimates YTD – February 2023
Source: Bloomberg. Data as of February 2023.
Another relative year-to-date performance driver has been U.S. natural gas. The warmer than normal winter, especially in the North East, caused a large decline in prices. CMCI by index design has a much smaller exposure to U.S. natural gas, which is rebalanced monthly to a target weighting of 3.5%. BCOM previously held 8.0% U.S. natural gas weighting but fell to 6.0% in February. Adversely, had the winter months been colder than expected, CMCI’s relative performance could have suffered. Of utmost importance is the monthly reweighting back to the target weights, which helps relative performance over the longer term. This is evident in a volatile mean-reverting commodity like U.S. natural gas.
Sector Review: Small Gains in the Livestock Sector
For the month of February, CMCI lost 3.7% while BCOM lost 4.7%. The livestock sector provided a very small amount of positive performance as both live cattle and hog prices rose slightly. And while the energy, industrial metals and precious metals sectors all declined during February, CMCI’s exposure to cocoa helped to reduce the overall decline in the agriculture sector. BCOM had no exposure to cocoa.
Most of CMCI’s relative outperformance for the month came from lower exposure to the precious metals sector. Gold fell 5% and silver fell 12% during February.
CMCI Outperformed BCOM in the Energy and Industrial Metals Sectors
Performance by Sector Components
Source: Bloomberg. Data as of February 2023.
Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.
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Originally published 08 March 2023.
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