Elkhorn partners with Research Affiliates on smart beta commodity ETF

Sep 26th, 2016 | By | Category: Commodities

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US-based investment company Elkhorn Investments has partnered with smart beta specialist Research Affiliates to launch the Elkhorn Fundamental Commodity Strategy ETF (Bats: RCOM). The Bats-listed ETF provides exposure to a broad basket of commodity futures weighted according to fundamental analysis.

Elkhorn and Research Affiliates launch smart beta commodity ETF

The Elkhorn Fundamental Commodity Strategy ETF seeks enhanced returns through a smart beta weighting process of 24 commodity futures based on price momentum and roll yield.

Rob Arnott, Chairman and Chief Executive Officer of Research Affiliates, commented: “Much is made of smart beta strategies within equities and increasingly bonds. The need for smart beta strategies within broad commodities, however, has largely been overlooked. We believe commodities can be a powerful inflation hedge and diversifier. Commodities can also offer excellent long-term return potential, especially from current levels, especially if the index rebalances against fads and bubbles.”

Ben Fulton, Founder and CEO of Elkhorn, added: “Commodities are a forgotten asset class in today’s market. As a result, product innovation has lagged that of other asset classes for the better part of a decade. Together with Research Affiliates, we are excited to create a better way for investors to access the broader commodity market in an ETF.”

The fund’s underlying index is the Dow Jones RAFI Commodity Index which tracks the price performance of futures contracts in 24 separate commodities across three sectors (energy, agriculture & livestock, and metals). The full list of commodities includes WTI crude oil, heating oil, Brent crude oil, RBOB gasoline, gasoil, natural gas, Chicago wheat, Kansas wheat, corn, soybeans, coffee, sugar, cocoa, cotton, live cattle, feeder cattle, lean hogs, aluminium, copper, lead, nickel, zinc, silver, and gold.

The weighting scheme is a modification of that used in the parent Dow Jones Commodity Index. In the parent index, commodities are liquidity weighted with the 18 components (or sectors) equal weighted. For the RAFI version of the index, the basic weights are modified with over or underweighting applied based on fundamental factors represented by a 50/50 combination of momentum and roll yield. In addition, unlike the parent index, the RAFI index does not have a capped component rule, ensuring that the impact of the momentum and roll yield factors is fully realized without constraints. The index is rebalanced on the last business day of each month.

The ETF is actively managed as opposed to a straightforward passive index-tracker. Although it generally aims to produce highly correlated returns to the Dow Jones RAFI Commodity Index, the ETF will aim to beat this benchmark in the long run. As such, the ETF may on occasion hold futures contracts for commodities outside of the eligible 24 commodities stated in the index. In addition, the fund earns a yield return on a portfolio of short duration, highly liquid, high quality bonds submitted as collateral to the futures exchange.

As of 21 September 2016, the fund’s largest holdings were soybeans (18.5%), gold (13.4%), copper (11.9%), WTI Crude Oil (7.1%) and Brent Crude Oil (5.6%). The largest sector exposures are to agriculture (36.0%), base metals (23.9%), energy (21.7%) and precious metals (18.4%).

As of 31 August 2016, the index was up 9.0% year-to-date, ahead of the 7.5% return for the Bloomberg Commodity Index over the same period. The index also outperformed on a relative basis during 2015, falling by 20.2% compared to a loss of 24.7% for the Bloomberg index.

The fund has a total expense ratio of 0.75%.

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