Elkhorn teams up with DWA on momentum-based commodity rotation ETF

Sep 21st, 2016 | By | Category: Commodities

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US-based investment firm Elkhorn Investments has unveiled the Elkhorn Commodity Rotation Strategy ETF (Nasdaq: DWAC), the first commodity exchange-traded fund to be based on a proprietary relative strength methodology developed by Dorsey, Wright & Associates (DWA).

Elkhorn unveils first momentum-based commodity rotation ETF

Tom Dorsey, Founder of Dorsey, Wright & Associates.

The Nasdaq-listed ETF, which is based on the Elkhorn Dorsey Wright Commodity Rotation Index, provides equal-weighted exposure to the five commodities (out of a potential universe of 21) which display the strongest relative momentum on a month-to-month basis.

According to Elkhorn, investors in the ETF stand to benefit from a broad commodity basket investment which seeks to enhance returns by shifting exposures based on the unique market cycles of individual commodities.

Ben Fulton, Founder and CEO of Elkhorn, commented: “This is not only the first DWA-based commodity ETF, but also the first purely tactical commodity ETF in the marketplace. Investors looking for a highly selective portfolio of commodities now have a solution.”

Tom Dorsey, Founder of Dorsey Wright & Associates, added: “I have long been a believer in tactical opportunities within the commodity market. We have built commodity-based models for decades, yet this is the first ETF based on our commodity research. For investors unsure of how to invest in commodities, DWAC’s strategy gives investors dynamic exposure to the commodity marketplace.”

In the context of the DWA strategy, relative strength compares the price performance, or momentum, between indices, each representing an investment in a perpetually rolled futures contract based on a specific commodity. According to DWA, the absolute momentum of the individual indices is not as important as the relative momentum between them. The model determines whether a commodity index’s momentum is increasing relative to another commodity index and assigns a buy signal if it is. The indices are then ranked in descending order according to their cumulative number of buy signals.

Momentum-based strategies rely on investors continuing to support assets which are increasing in value. Investors are known to be trend chasers, continuing to buy as prices increase and sell as it decreases. Some investor traits that have been identified through the study of behavioural finance may provide an explanation.

Investors tend to anchor themselves to perceptions of asset value, responding slowly to new information contradicting their valuations. Also, investors wish to avoid the regret of mistiming the market. In this case they may hold the asset longer than is prudent, not wishing to sell early and miss out on potential returns.

The list of potential commodity futures include corn, cocoa, WTI crude oil, brent crude oil, cotton, gold, NY Harbor ULSD (heating oil), coffee, HRW wheat, aluminium, live cattle, lean hogs, copper, zinc, natural gas, gasoil, soybeans, sugar, silver, SRW wheat and RBOB gasoline.

Although the fund generally holds all the components of the benchmark, it is an actively managed ETF instead of a conventional passive index-tracker. It therefore seeks to exceed the benchmark performance and may, at times, alter the weights of the benchmark constituents or invests outside of the current components.

As of 20 September 2016 the fund was invested in futures contracts for coffee (21.3%), cotton (20.9%), sugar (20.3%), silver (19.4%) and zinc (18.1%), resulting in a sector exposure breakdown to agriculture (62.5%), precious metal (19.4%) and base metals (18.1%).

The ETF utilizes an intelligent roll strategy to mitigate the potential negative rolling costs associated with contango-shaped futures curves. Investors also benefit from the yield earned on a short duration portfolio of highly liquid, high quality bonds submitted as collateral to the futures exchange.

The fund has a total expense ratio of 0.99%.

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