BNP Paribas has launched the BNP Paribas EUR Hedged RICI Enhanced Brent Crude Oil Total Return Index ETC (Xetra: BNQX), an exchange-traded commodity which allows investors to participate in the performance of Brent Crude oil prices while hedging returns relative to the euro.
The Rogers International Commodity Enhanced Brent Crude Oil
Total Return Index removes some of the short term risk associated with a futures-based index by purchasing contracts that expire in June or December only.
The ETC tracks the Rogers International Commodity Enhanced Brent Crude Oil Total Return Index, a US dollar-denominated reference for the price performance of 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).
This currency-hedged unit class will hedge against exchange rate fluctuations between the US dollar and the euro.
While BNP Paribas launched the original version of this ETC in October 2016, this currency-hedged share class will suit European investors looking to hedge against exchange rate fluctuations between the US dollar and the euro.
BNQX has a total expense ratio (TER) of 1.20%.