WisdomTree Europe has launched a new smart beta commodity exchange traded fund with a built-in mechanism that helps reduce the cost of holding commodity future contracts, meaning investors can hold the ETF in their portfolios for longer.

WisdomTree Europe launches smart beta commodity ETF

The WisdomTree Enhanced Commodity UCITS ETF (WCOA), listed on the London Stock Exchange on Monday 9th, tracks the Optimised Roll Commodity Total Return index, a broadly diversified index with weightings based on the Bloomberg Commodity index. The Optimised Roll Commodity Total Return index consists of 22 commodities with sector exposures of 35.5% in agriculture, 30.9% in energy, 17% in industrial metals and 15.6% in precious metals.

Data from WisdomTree shows that along with having lower volatility, the index has outperformed the S&P GSCI Total Return index, the Bloomberg Commodity index and the Thomson Reuters CRB index over the past 1, 3, 5 and 10 years, respectively.

Viktor Nossek, Director of Research at WisdomTree Europe, said: “Investors are keen to incorporate broad commodity exposures in their portfolios due to the fact that it has low to negative correlations to other asset classes and therefore enhances portfolio diversification. The roll methodology in the WisdomTree Enhanced Commodity UCITS ETF substantially mitigates the costs of holding commodity futures contracts and has historically generated positive roll returns. This removes one of the main barriers to having a long term allocation to commodities, whilst the current macro environment is also supportive of increased exposure to this asset class.

“Across the various commodity sectors, fundamentals have improved; ranging from a steadier environment for the oil price, negative interest rates likely to benefit sentiment towards gold and a more positive view on emerging markets activity that may drive returns in industrial metals.”

The index also incorporates a smart roll mechanism, based on the S&P GSCI Dynamic Roll indices, which looks to mitigate negative roll yield.

Commodity futures contracts trade either in contango, where forward month futures contracts cost more than the current month (negative roll yield), or in backwardation, where forward month futures contracts trade at a discount to the current month (positive roll yield). It is usually the supply/demand factor that determines whether the commodity is in contango or backwardation.

The Optimised Roll Commodity Total Return index has a built in mechanism that aims to minimize contango and maximise backwardation.  This is done with a rules based dynamic approach to rolling futures contracts. The results of the enhanced roll strategy are reflected in the higher returns and lower risk relative to other benchmark commodity indices such as the S&P GSCI Total Return index, the Bloomberg Commodity Index and the Thomson Reuters CRB index.

Hector McNeil, Co-CEO of WisdomTree Europe said in a statement: “The new Enhanced Commodity UCITS ETF offers a unique combination of exposure to broad commodities based on the underlying weights of the Bloomberg Commodity Index and enhanced roll returns. WisdomTree Europe has been successful in providing smart beta and alternatively weighted solutions in the equity space and is delighted to extend its smart approach to commodities which we believe is an important asset class.”

It is not practical to physically invest in a range of commodities, the fund gets its commodities exposure through an unfunded total return swap that tracks the underlying futures contracts representing the 22 components of the Bloomberg Commodity Index. The fund invests in and physically holds US T-bills and any swap exposure is over-collateralised and reset on a monthly basis.

The ETF has a base currency in US dollars, but is offered in GBP distributing and accumulating share classes (WCOG/WCOB). It has a total expense ratio of 0.35%.