UBS Asset Management has launched a new ETF in Europe which seeks to exploit the shape of the futures curve in commodity markets.
The fund seeks to capture the roll yield of futures contracts while remaining unexposed to the underlying commodity markets.
The UBS ETF CMCI Commodity Carry SF UCITS ETF has listed on Deutsche Börse (UEQC GY) in euros, on London Stock Exchange (CCUA LN) in pound sterling, and is scheduled to be rolled out on SIX Swiss Exchange (CCMCUA SW) in US dollars at the beginning of February.
The fund is linked to the UBS Bloomberg CM-BCOM Outperformance Strategy ex-Precious Metals 2.5 Leveraged Net of Cost Total Return Index.
The index consists of a long position in the UBS Bloomberg Commodity ex-Precious Metals Constant Maturity Commodity Index (CMCI) and a short position in the Bloomberg Commodity ex-Precious Metals Index (BCOM). The exposure to both sub-indices is leveraged by 250%.
Due to the total return feature of the ETF’s index, it also includes a fixed income return which reflects the interest on cash used to post margins on the underlying futures contracts.
Each sub-index consists of a diversified mix of futures contracts representing more than 20 commodities across four sectors. Commodities are assigned target weights, updated annually by Bloomberg, according to economic significance and market liquidity.
In 2019, the target weights for the sub-indices’ commodity sectors were energy (37.7%), agriculture (29.6%), industrial metals (28.5%), and livestock (4.2%). Both sub-indices rebalance to these target weights on a monthly basis.
The main difference between the two sub-indices is the maturity of the futures contracts in which they invest. BCOM provides exposure to near-dated (one-month) futures contracts, whereas CMCI provides diversity across contract tenors ranging from three months up to a maximum of three years. Additionally, small proportions of the underlying futures in CMCI are rolled daily to avoid the potential problems associated with the punctual roll of traditional indices.
By taking a short position in BCOM and a long position in CMCI, the strategy seeks to capture roll yield (the yield that a futures investor captures as their long position in a futures contract converges to the spot price) while remaining unexposed to the market movements of the underlying commodities.
In particular, the strategy should profit from commodities where the futures curve is in backwardation – the futures price is lower than the spot price. In contrast, markets that are in contango – when the futures price is higher than the spot price – should negatively impact performance.
Exposure to precious metal commodities is notably absent from the strategy. UBS has likely taken this approach as the shape of the futures curve for precious metal commodities is almost always in contango. This is due to structural characteristics of these commodities such as their durability, ease of storage, and absence of short-term supply disruptions which would increase current prices and make backwardation more likely.
The fund comes with an expense ratio of 0.34%.