French banking giant BNP Paribas has launched five exchange-traded commodities on Deutsche Börse’s Xetra and Frankfurt exchanges. Each provides exposure to the price performance of futures contracts referencing one of five energy sector commodities: gasoline, diesel, heating oil, natural gas, or WTI crude oil.
BNP Paribas has launched a total of six energy sector ETCs in September, covering exposure to futures contracts tracking gasoline, diesel, heating oil, natural gas, WTI crude oil, or Brent crude oil.
They complement an existing ETC tracking the price performance of Brent Crude oil futures which was launched earlier in the month.
The new ETCs, which trade in euros, track US dollar-denominated indices from the Rogers International Commodity Enhanced Indices (RICI) family.
By utilising futures-based exposure, investors are able to avoid the storage and transportation costs associated with direct physical investment in commodities.
The strategy does have its drawbacks, however.
The limited maturity of the 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). This forces investors to suffer a significant negative roll return as they sell their cheaper contracts to buy more expensive ones.
Increasingly, a growing number of commodity ETPs are attempting to navigate this issue by ‘optimising’ their roll 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)
In terms of the RICI indices, only contracts expiring in June or December are bought for each index. This removes some of the short term risk in a futures based index. However, investors should note that performance may be negatively affected when the spot price return decreases by more than the roll yield (where the spot price of a commodity in backwardation decreases by more than the roll yield, or that the spot price of a commodity in contango increases by less that the roll yield).
The full list of energy ETCs from BNP Paribas is listed below. Each has a total expense ratio of 1.00%.
BNPP RICI Gasoline Enhanced ETC (BNQG)
BNPP RICI Diesel Enhanced ETC (BNQF)
BNPP RICI Heating Oil Enhanced ETC (BNQH)
BNPP RICI Natural Gas Enhanced ETC (BNQE)
BNPP RICI WTI Oil Enhanced ETC (BNQD)
BNPP RICI Brent Crude Enhanced ETC (BNQC)