BNP Paribas rolls out EUR-hedging on six RICI Enhanced commodity ETCs

Aug 10th, 2019 | By | Category: Commodities

FACTOR INVESTING - THURSDAY 14TH JULY 2022 (08:15-11:30) - THE BERKELEY, LONDON Please join us for our annual factor investing breakfast briefing with participation from MSCI, FlexShares ETFs, Tabula and Professor Stefan Zohren, Deputy Director of the Oxford-Man Institute of Quantitative Finance. Please register now if you would like to attend.

French banking and investments giant BNP Paribas has launched euro-hedged share classes for six of its commodity ETCs listed on Xetra.

BNP Paribas rolls out EUR-hedging on six RICI Enhanced commodity ETCs

Each EUR-hedged ETC comes with an expense ratio of 1.20%.

The ETCs use futures contracts to provide exposure to nickel, copper, natural gas, WTI crude oil, Brent crude oil, and a basket of industrial metals.

Each is linked to a ‘RICI Enhanced’ index, part of the Rogers International Commodity Index (RICI) stable of indices created by well-known commodities investor Jim Rogers.

Rolling futures contracts

By utilizing futures to obtain exposure, investors are able to avoid the storage and transportation costs associated with a direct physical investment in commodities.

The limited maturity of 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 typically gain exposure via investment in the nearest dated futures contract or front-month contract. This strategy has drawbacks when markets are in contango (where the forward price of the front-month contract is trading well above the spot price) as investors can realize a negative roll return as they sell their cheaper contracts to buy more expensive ones.

RICI Enhanced methodology

Some commodity indices attempt to mitigate this issue by ‘optimizing’ 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 minimize the traditionally high compounding costs of monthly rollovers.

The RICI Enhanced indices follow the performance of futures contracts with varying maturities. They roll over their contracts twice a year, buying contracts expiring in June or December only. This removes some of the short-term risks in a futures-based index.

The six ETC share classes are outlined below:

BNPP RICI Enhanced Nickel (ER) Index EUR Hedged ETC (OGZC GR)
BNPP RICI Enhanced Copper (ER) Index EUR Hedged ETC (OGZB GR)
BNPP RICI Enhanced Natural Gas (ER) Index EUR Hedged ETC (OGZA GR)
BNPP RICI Enhanced WTI Crude Oil (ER) Index EUR Hedged ETC (B4NZ GR)
BNPP RICI Enhanced Brent Crude Oil (ER) Index EUR Hedged ETC (B4NY GR)
BNPP RICI Enhanced Industrial Metals (ER) Index EUR Hedged ETC (OGZD GR)

Each ETC is also available in a euro-denominated, non-hedged share class as well as a US dollar-denominated share class. The currency-hedged share classes come with expense ratios of 1.20%, while the unhedged ETCs cost 1.00%.

Tags: , , , , , ,

Leave a Comment