Real Return Series ETFs Piece #3

In our introductory piece we outlined the commodity asset class and explain some of the unique characteristics inherent in futures based products specific to commodities.

There are many products available and given the large variance of performance, it is very important to examine the construction methodology and assess the uniqueness of each.

FTGC-First Trust Global Tactical Commodity Fund-Active $183 Million AUM

Futures contract based
Zenith insight-This manager utilizes volatility studies to determine risk and position levels. They actively rebalance at least monthly to mitigate risk and volatility and the composition of the portfolio will change and differ to a large degree from the benchmark.

The benchmark is the Bloomberg Commodity Index and they have beaten it for the short time they have been in existence especially YTD by a wide margin. They have the potential but no guarantee to be able to mitigate contango.

GCC-Greenhaven Continuous Commodity Index-Passive $360 Million AUM

Futures contract based
Zenith insight-This ETF seeks to passively track its index through daily rebalancing to keep the weightings at 1/17 of the portfolio. While there is little active process, the adherence to a different index is refreshing. Typically and early in the game, funds had as their benchmark, the DJ-UBS Commodity Index or the Goldman Sachs energy heavy index.

They manage around the Thompson Reuters Continuous Equal Weighted Index which means that some of the energy heavy bias in other indexes is mitigated as agriculture is increased in percentage in addition to metals. They do not have much ability to mitigate the effects of contango in the portfolio.

GSG-I-Shares GSCI Commodity Index Trust-Passive $1.1Billon AUM

Futures Contract Based
Zenith Insight-This ETF lacks inspiration in a few ways. First, it seeks to track a very energy heavy Goldman Sachs Index and does not offer much in terms of value added tactics. This should be evaluated and replaced with a more dynamic investment.

DBC-Powershares DB Commodity Tracking Fund-Passive $5.6Billion AUM

Futures Contract Based
Zenith Insight
This fund similar to GSG has little appeal in the weighting scheme as the weights are typically going to favor energy and specifically oil. They do however have the structural ability to invest in contracts beyond the near month to help mitigate the effects of contango.

It tracks the DBIQ Optimum Yield Commodity Index which allows for this flexibility. The results have been reasonable and potentially worth a look.

CMDT-I-Shares Commodity Optimized Trust-Passive $13Million AUM

Futures Contract Based
Zenith Insight
This fund was created we feel in part due to its sister product mentioned above that lacks a dynamic method to deal with the effects of contango. It does not possess a unique weighting methodology.

Bloomberg Roll Select Commodity Index is the chosen benchmark that structurally allows for some contango mitigation.

USCI-United States Commodity Index Fund-Passive $646 Million

Futures Contract Based-but allows for non-futures exposure
Zenith Insight
This fund deserves consideration as it utilizes a unique benchmark that is equally weighted and rebalanced on a monthly basis. Regular rebalance mechanisms are important as this is a dynamic asset class.

The benchmark is the SummerHaven Dynamic Commodity Index Total Returnâ„  (SDCITR) is an index designed to reflect the performance of a portfolio of 14 commodity futures. This ETF deserves attention.

Our goal at this juncture was to familiarize your firm with the various ETF products available with some assessment and directional guidance.

We would like your investment committee to take away a couple major points as you examine your commodity exposure.

a. Contango/Backwardation-Please take the time to examine these two characteristics of futures based products prior to making a placement.
b. Some of these funds are more capable of handling this issue and it is very important to decipher this.
c. Index benchmark selection can have major implications for risk adjusted and absolute performance. As we pointed out, some of these ETFs possess a more dynamic weighting scheme that holds the potential for outperformance.

We will take the time to outline some of the Exchange Traded Notes (ETNS) in our next piece on commodities. This will help drive the decision between ETFs and ETNs for investment committees. It will also help illustrate reasonably obvious examples of funds that should be sold and replaced.

Lastly, with most commodity indexes and products experiencing reasonable to robust performance year to date, this is a VERY good time to examine your holdings in this area.


Tom Koehler-CIO