iShares launches roll-optimised commodity ETP

Aug 15th, 2013 | By | Category: Commodities

iShares, the world’s largest provider of exchange-traded funds (ETFs) and best known for its equity and fixed income products, has expanded its offering in the commodities space with the launch of the iShares Dow Jones-UBS Roll Select Commodity Index Trust (CMDT) on the NYSE Arca.

iShares launches roll-optimised commodity ETP

iShares’ new commodity ETP optimises the rolling of futures contracts to minimise the effects of contango.

The product is designed to provide exposure to a broad basket of commodity futures while reducing the negative effects of ‘contango’ and accentuating the benefits of ‘backwardation’.

It is the first exchange-traded product based on the Dow Jones-UBS Roll Select Commodity Index, an index which tracks 22 commodities futures contracts, including agriculture, energy and metals, and is structured to minimise the costs of closing expiring futures contracts and replacing them for new ones.

When the futures contracts are close to expiring, the index replaces the contracts with new ones via a process known as rolling. If the index is rolling contracts for costlier later-dated contracts then the commodity market is in contango, which may detract from performance. If the later-dated contracts are less expensive than the contracts held in the index, then the commodity market is in backwardation, which may add to performance.

The Dow Jones-UBS Roll Select Commodity Index, which is a version of the widely followed Dow Jones-UBS Commodity Index, aims to mitigate the effects of contango on performance by rolling into the futures contract that shows the most backwardation or least contango, selecting from those contracts with nine months or fewer until expiration.

Ravi Goutam, Head of Americas Product for iShares, said: “Many investors look to commodities to diversify beyond stocks and bonds, but when investing in commodity funds that typically hold futures contracts, the buying and selling of contracts can detract from fund performance.”

He added: “By using an innovative index the iShares Dow Jones-UBS Roll Select Commodity Index Trust seeks to minimise the costs of changing or ‘rolling’ futures contracts, enabling the Trust to ultimately provide investors efficient access to diversified commodities.”

The product has an expense ratio of 0.75%.

UK and European investors looking for similar roll-optimised exposure to commodities have an extensive list of products available to them. Examples include the UBS-ETF CMCI Composite (UC15), which is based on the UBS Bloomberg Constant Maturity Commodity Index Composite; the iShares S&P GSCI Dynamic Roll Commodity Swap ETF (SDYC), which tracks the S&P GSCI Dynamic Roll Capped Commodity 35/20 Index; the db Commodity Booster ETC (XCT5), which reflects the performance of the S&P GSCI Index with Deutsche Bank’s roll-optimisation process applied; and the more active oriented Lyxor ETF Broad Commodities Optimix TR (OPTM), which tracks the SGI Commodities Optimix TR Index. All listed on the London Stock Exchange.

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