UBS Asset Management has launched the UBS Bloomberg Commodity CMCI UCITS ETF (BCCU) on the London Stock Exchange, offering exposure to the performance of a basket of commodity futures contracts with an advanced futures rolling methodology.
The UBS Bloomberg Commodity CMCI UCITS ETF provides exposure to a broad commodity basket while utilising an advanced rolling methodology.
The fund’s underlying UBS Bloomberg CMCI Index combines the constituent commodity weights of the Bloomberg Commodities Index with the rolling technique of the UBS Constant Maturity Commodity Index family of indices which UBS proposes is more effective in mitigating the effects of negative roll yield.
The Bloomberg Commodity Index has more than $60 billion in broad commodity tracking assets directly linked to its performance and is the most widely followed benchmark used by institutional investors for diversified commodity investments.
It is well diversified with exposure to over 20 commodities and contains components in the agriculture (currently 29.6% index weight), energy (28.4%), industrial metals (18.1%), precious metals (16.8%) and livestock (7.1%) sectors.
The index caps (max 15%) and floors (min 2%) the exposure of any one commodity in the index, resulting in a more balanced index weighting. The commodities with the largest current exposures are gold (12.4%), corn (7.9%), copper (7.9%), natural gas (7.6%) and Brent crude oil (7.2%).
By utilising futures to obtain commodity 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.
The UBS Constant Maturity Commodity Index attempts to navigate this issue by implementing a daily rolling mechanism, which uses up to five different tenor points across different commodity futures curves. It has a strong track record over the past ten years, with rolling performance exceeding the roll yield on the Bloomberg Commodities Index by an average of 3.6% per annum since inception.
Andrew Walsh, head of passive and ETF specialist sales UK & Ireland, commented: “Accessing commodities in a UCITS structure requires the underlying index to use futures contracts as physical delivery is not permitted. This means that the process by which futures contracts are rolled in the underlying index can have a very significant impact on overall performance of the ETF”.
“The Constant Maturity Commodity Index methodology has proven advantageous when compared to exposure via short term contracts only.”
The fund has a total expense ratio (TER) of 0.37%. It is also offered with currency hedging relative to the Swiss franc or the euro.
This new ETF complements the existing UBS CMCI Composite USD SF UCITS ETF (LON: UC15) which has recently passed $1.1bn in AUM on the back of growing demand for more intelligent access to broad commodities markets. UC15 also has a TER of 0.37%.
European ETF provider Source also recently unveiled a new commodity ETF tracking the Bloomberg Commodity Index. Launched in January of this year, the Source Bloomberg Commodity UCITS ETF (LON: CMOD) quickly rose to over $1bn in AUM.