BNP Paribas lists currency-hedged commodity ETF on Xetra

Oct 11th, 2017 | By | Category: Commodities

BNP Paribas has launched a currency-hedged commodity ETF, offering exposure to a diversified portfolio of futures contracts on energy and metal commodities, while hedging currency exposure between the US dollar and the euro.

BNP Paribas lists currency hedged commodity ETF on XETRA

The index gives exposure to 11 commodities in the energy and metals sectors.

The BNP Paribas Energy & Metals Enhanced Roll UCITS ETF EUR Hedged UCITS ETF (Xetra: XXXX) provides currency-hedged exposure to 11 commodities by tracking the BNP Paribas Easy Energy & Metals Enhanced Roll Index. Gold is currently the largest weight in the portfolio with 19.1%, followed by copper (14.0%) and natural gas (11.4%).

By utilising futures-based exposure, investors are able to avoid the storage and transportation costs associated with direct physical investment in commodities. The strategy does have its drawbacks, however.

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.

Increasingly, a growing number of commodity ETFs are attempting to navigate this issue by ‘optimising’ their roll 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.

The index achieves its exposure to commodities by tracking the performance of S&P GSCI Dynamic Roll indices on individual commodities, which aim to minimise the carry cost when the curve is in contango while benefiting from the positive carry when the forward curve is in backwardation.

Over the last three years, the index has outperformed the Bloomberg Commodities ex-Agriculture & Livestock Index, returning -7.0% compared to -11.5%.

The fund is accumulating and has a total expense ratio of 0.49%.

A non-currency-hedged version of the ETF has been available to trade on Xetra under the ticker symbol GDSE since April 2016 and currently has €125 million in assets.

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