UBS introduces GBP-hedged share classes on two commodity ETFs

Mar 7th, 2018 | By | Category: Commodities

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UBS has extended its currency-hedged product suite with the introduction of pound sterling-hedged share classes on a pair of commodity ETFs.

UBS has introduced GBP-hedged share classes for a pair of commodity ETFs.

UBS has introduced GBP-hedged share classes for a pair of commodity ETFs.

The new share classes, which track GBP-hedged indices, mitigate the risk of currency movements between sterling and the US dollar adversely affecting fund performance.

They are the UBS CMCI ex-Agriculture SF UCITS (hedged to GBP) ETF (CCXAG SW) and the UBS Bloomberg Commodity CMCI SF UCITS (hedged to GBP) ETF (BCCMG SW).

The former tracks the UBS Bloomberg CMCI Ex-Agriculture Ex-Livestock Capped Index GBP Hedged TR providing commodity exposure excluding agricultural and livestock commodities, while the latter tracks the UBS Bloomberg BCOM Constant Maturity Commodity Index hedged to GBP TR offering a fuller commodities exposure.

Both have been listed on Zurich’s SIX Swiss Exchange, with cross-listings on London Stock Exchange likely to follow.

The indices

The UBS Bloomberg CMCI Ex-Agriculture Ex-Livestock Capped Index combines the constituent commodity weights of the Bloomberg Commodities Ex-Agriculture Ex-Livestock Index with the rolling technique of the UBS Constant Maturity Commodity Index (CMCI) family of indices, which UBS proposes is more effective in mitigating the effects of negative roll yield.

The Bloomberg Commodities Ex-Agriculture Ex-Livestock Index is well diversified with exposure to over 14 commodities across three commodities sectors: industrial metals (44.9%), energy (43.4%) and precious metals (11.8%) (Data as of the end of January 2018).

The index caps (max 15%) and floors (min 2%) the exposure of any one commodity in the index, resulting in a more balanced index weighting. The commodities with the largest current exposures are aluminium (12.9%), copper (12.4%), Brent crude oil (10.8%), light crude oil (10.7%) and gold (9.5%).

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

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 gain exposure via investment in the nearest dated futures contract or front month contract. This strategy has recently shown its limits with steep contango curves (where the forward price of the front month contract is trading well above the spot price). Investors may realise a negative roll return as they sell their cheaper contracts to buy more expensive ones.

The CMCI attempts to overcome this issue by implementing a daily rolling mechanism, which uses up to five different tenor points across different commodity futures curves.

Meanwhile the UBS Bloomberg BCOM Constant Maturity Commodity Index combines the constituent commodity weights of the Bloomberg Commodities Index with the rolling technique of the CMCI.

The Bloomberg Commodity Index has more than $60 billion in broad commodity tracking assets directly linked to its performance and is the most widely followed benchmark used by institutional investors for diversified commodity investments.

It is well diversified with exposure to over 20 commodities and contains components in the agriculture, energy, industrial metals, precious metals and livestock sectors.

The index caps (max 15%) and floors (min 2%) the exposure of any one commodity in the index, resulting in a more balanced index weighting. The commodities with the largest current exposures are gold (12.4%), corn (7.9%), copper (7.9%), natural gas (7.6%) and Brent crude oil (7.2%).

The hedging

To put on the currency hedges, UBS sells forward the US dollar at the one-month forward rate for an amount equal to the total value of the fund at the start of the month. The amount hedged remains constant over the entire month.

The new launches build out the firm’s currency-hedged offerings in the commodity space with EUR-hedged and CHF-hedged versions of these commodity ETFs already available.

Both funds trade in GBP and have total expense ratios (TERs) of 0.37%. Income is accumulated.

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