BNP Paribas launches ‘enhanced’ Brent Crude ETC on Deutsche Börse

Oct 15th, 2016 | By | Category: Commodities

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French banking giant BNP Paribas has launched an exchange-traded commodity on Deutsche Börse’s Xetra and Frankfurt exchanges which allows investors to participate in the performance of Brent Crude oil prices.

BNP Paribas launch optimised roll Brent Crude ETC on Deutsche Börse

The BNP Paribas RICI Enhanced Brent TR Index ETC (BNQC) seeks to minimise the effects of negative roll yields by tracking Brent Crude oil futures expiring in June or December only.

The BNP Paribas RICI Enhanced Brent TR Index ETC (BNQC) tracks the Rogers International Commodity Enhanced Brent Crude Oil Index, a US dollar-denominated reference for the price performance Brent crude oil futures contracts with varying maturities. The ETC itself trades in euros.

Due to historically low correlations between crude oil and major asset classes, the ETC may enhance the risk/return profile of traditional stock/bond portfolios.

By utilising futures to obtain exposure to crude oil, investors are able to avoid the storage and transportation costs associated with direct physical investment in the commodity. The strategy does have its drawbacks though.

The limited maturity of the 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). This forces investors to suffer a significant negative roll return as they sell their cheaper contracts to buy more expensive ones.

According to BNP Paribas, steep contango curves in the crude market have arisen because of both fundamental factors such as the upside geopolitical risk factored into medium term oil prices, and technical factors such as the crowding out effect of increased investment in commodity index products with front month buying strategies.

Recently, a growing number of commodity investments are attempting to navigate this issue by ‘optimising’ 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 minimise the traditionally high compounding costs of monthly rollovers.

Recent research from European ETF provider Source highlights the benefit of adopting an optimised rolling strategy compared to ETFs that strictly invest in front-month futures contracts. (See: Source highlights benefits of roll-optimised “second generation” commodity ETFs)

The Rogers International Commodity Enhanced Brent Crude Oil Index rolls over its contracts twice a year, buying contracts expiring in June or December only. This removes some of the short term risk in a futures based index. However, those tracking the index should note that performance may be negatively affected where the spot price return decreases by more than the roll yield (where the spot price of a commodity in backwardation decreases by more than the roll yield, or that the spot price of a commodity in contango increases by less that the roll yield).

Brent Crude prices reached a multi-year low of just $27.88 per barrel on 20 January 2016. Since then prices have generally been trending upwards with a barrel of black gold trading for $47.58 as of 7 September 2016, representing a 70.7% gain over this period.

Brent Crude futures prices between 1 January - 7 September 2016. Source: CNBC

Brent Crude futures prices between 1 January – 7 September 2016.
Source: CNBC

The ETC has a total expense ratio (TER) of 1.00%.

BNP Paribas is not the first European issuer to list an oil-tracking exchange-traded product that takes advantage of an optimised rolling strategy; UBS and ETF Securities have similar products currently available.

The UBS CMCI Oil USD ETF (Six: OILUSA) tracks the UBS Bloomberg CMCI WTI Crude Oil TR Index which extends beyond short dated futures contracts and diversifies investment across the maturity curve. According to UBS, by providing investors with access to “Constant Maturities”, it not only gives a more continuous exposure to the asset class and avoids the speculative activity that can surround monthly rolls of traditional indices, but can also minimise exposure to negative roll yield. There is a TER of 0.26%.

ETF Securities provides the ETFS Brent 1yr (LSE: OSB1), the ETFS Brent 2yr (LSE: 0SB2) and the ETFS Brent 3yr (LSE: OSB3), providing access to the performance of 1-year, 2-year and 3-year Brent oil futures contracts respectively. The exposure is obtained through swaps, allowing continual targeted access to the ongoing price of contracts at their respective maturity dates. They cost 0.49% each.

 

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