French banking and investments giant BNP Paribas has launched a new currency-hedged share class for its BNP Paribas RICI Enhanced Energy Index ETC.
The ETC provides exposure to a basket of six commodities, namely WTI crude oil, Brent crude oil, petrol, natural gas, heating oil, and gas oil.
The BNP Paribas RICI Enhanced Energy Index EUR-hedged ETC (B4NX GR) has been listed on Xetra and provides exposure to a basket of energy commodities while hedging currency exposure relative to the euro.
The ETC is linked to the RICI Enhanced Energy Index, a component of the Rogers International Commodity Index (RICI) stable of indices created by well-known commodities investor Jim Rogers.
The index consists of futures contracts tracking the performance of six energy-related commodities, namely WTI, Brent, petrol, natural gas, heating oil, and gas oil.
The currency-hedged share class comes with an expense ratio of 1.20%, while the original unhedged ETC costs 1.00%.
Rolling futures contracts
By utilizing 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 typically gain exposure via investment in the nearest dated futures contract or front-month contract. This strategy has drawbacks when markets are in contango (where the forward price of the front-month contract is trading well above the spot price) as investors can realize a negative roll return as they sell their cheaper contracts to buy more expensive ones.
RICI Enhanced methodology
Some commodity indices attempt to mitigate this issue by ‘optimizing’ 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 minimize the traditionally high compounding costs of monthly rollovers.
The RICI Enhanced indices follow the performance of futures contracts with varying maturities. They roll over their contracts twice a year, buying contracts expiring in June or December only. This removes some of the short-term risks in a futures-based index.