ETF Securities expands suite of sterling-hedged commodity ETCs

Mar 5th, 2012 | By | Category: Commodities

GBP-hedged commodity solution for UK investors

ETF Securities has expanded its range of sterling-hedged Exchange Traded Commodities (ETCs) with the launch of 14 new products on the London Stock Exchange.

The products are designed to provide commodities exposure while mitigating the effects of currency volatility in the portfolios of sterling-based investors by reducing exposure to the US dollar – the currency in which most commodities are priced.

The new ETCs track the performance of the Dow Jones-UBS Commodity Index Pound Sterling Hedged Daily Total Return and its sub-indexes. They are designed to reflect, as closely as possible, returns that would be generated if the underlying commodities were purchased in US dollars.

Foreign exchange exposure is hedged on a daily rather than monthly basis, in order to improve tracking performance, thereby mitigated unwanted currency exposure.

The table below illustrates how the daily hedge has provided better tracking than a monthly hedge over the period from 31 January 2007 to 31 January 2012.  It takes the Dow Jones-UBS Commodity Index – expressed in US dollars – and compares it with the returns from the Dow Jones-UBS Commodity Index Pound Sterling Hedged Daily and the Dow Jones-UBS Commodity Index Pound Sterling Hedged which is hedged monthly.

Dow Jones-UBS Commodity Index Returns


In short, a daily hedge can reduce slippage significantly. This is an important consideration for investors against a background of a rise in sterling volatility seen over recent decades. It is currently sitting at around 9% pa.

While volatility has declined from a peak of over 18% pa following the financial crisis, it remains an important determinant of asset price returns. Threats to the fragile global recovery like the eurozone debt crisis have the potential to reignite currency volatility, in turn causing greater uncertainty for portfolio returns.

The ETCs are issued by ETFS Hedged Commodities Securities Limited, a Jersey-based entity specifically created by ETF Securities to issue currency-hedged ETCs.

The ETCs track the Pound Sterling Hedged Daily versions of the Dow Jones-UBS Commodity Index and therefore use the same contracts and roll methodology already familiar to investors.

As is standard for commodity futures-based products, the ETCs are structured using swaps. However, ETF Securities fully collateralises the swaps and has appointed multiple swap counterparties (UBS and Merrill Lynch) to help minimise counterparty risk.

Commenting on the launch, Neil Jamieson, Head of UK Sales, ETF Securities, said: “These new sterling-hedged commodity products enhance our existing range of commodity investment solutions.  There are many sterling-based investors who wish to hedge out currency risk.  Our Exchange Traded Commodities that track Dow Jones-UBS Commodity Index Pound Sterling Hedged Daily will provide these investors with an innovative and effective solution.

“The products will also appeal to those investors who actively manage currency exposure with a view to enhancing overall investment returns.”

The 14 sterling-hedged ETCs are as follows:

ETF Securities launches sterling-hedged commodities solution for UK investors



Each of the 14 new products carries an MER (management expense ratio) of 0.49%.

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