UBS launches energy and industrial metals ‘commodity carry’ ETF

Feb 16th, 2021 | By | Category: Commodities

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UBS Asset Management has introduced its second commodity carry ETF in Europe, this time applying the strategy exclusively to energy and industrial metal commodity sub-sectors.

UBS launches new commodity carry ETF

Clemens Reuter, Global Head of UBS ETFs.

The UBS CMCI Commodity Carry Ex-Agriculture SF UCITS ETF has listed on Deutsche Börse in euros with unhedged (UBF6 GY) and hedged (UBF7 GY) share classes.

Commodity carry is a type of investment strategy that seeks to exploit the shape of the futures curve in commodity markets in order to maximize roll yield.

The new fund deploys this strategy by tracking the UBS Bloomberg CM-BCOM Outperformance Strategy Ex-Precious Metals, Agriculture, Livestock 2.5x Leveraged Index.

The index consists of a long position in the UBS Bloomberg Commodity ex-Precious Metals, Agriculture, Livestock Constant Maturity Commodity Index (CMCI) and a short position in the Bloomberg Commodity ex-Precious Metals, Agriculture, Livestock Index (BCOM). The exposure to both sub-indices is leveraged by 250%.

The index also includes a fixed income return which reflects the interest on cash used to post margins on the underlying futures contracts.

Each sub-index consists of a diversified mix of futures contracts representing ten commodities across the energy and industrial metal sub-sectors. Commodities are assigned target weights, updated annually by Bloomberg, according to economic significance and market liquidity.

In 2021, the target weights for the sub-indices’ sectors are approximately two-thirds (65.8%) for energy commodities and one-third (34.2%) for industrial metals.

The main difference between the two sub-indices is the maturity of the futures contracts in which they invest. BCOM provides exposure to near-dated (one-month) futures contracts, whereas CMCI provides diversity across contract tenors ranging from three months up to a maximum of three years. Additionally, small proportions of the underlying futures in CMCI are rolled daily to avoid the potential problems associated with the punctual roll of traditional indices.

By taking a short position in BCOM and a long position in CMCI, the strategy seeks to capture roll yield (the yield that a futures investor captures as their long position in a futures contract converges to the spot price) while remaining unexposed to the market movements of the underlying commodities.

The strategy should profit from commodities where the futures curve is in backwardation – when futures prices are lower than the spot price. By contrast, markets that are in contango – when futures prices are higher than the spot price – should negatively impact performance.

Exposure to precious metal commodities is also notably absent. UBS has likely taken this approach as the futures markets for precious metals are typically in contango.

According to UBS, the strategy offers stable absolute returns and a low correlation to major asset classes. As such, the ETFs may be utilized for diversification and as a complement to alternative hedge fund style investments.

Clemens Reuter, Global Head of UBS ETFs, said: “Since 2011, UBS ETFs have transformed investor access to commodity futures-based investing and consistently mitigated roll cost inefficiencies. With this launch, UBS AM ETFs exemplifies its attention to market demand and continues to innovate to provide solutions to its clients.”

UBS unveiled its first commodity carry ETF, the UBS ETF CMCI Commodity Carry SF UCITS ETF, one year ago. The fund follows the same strategy but applies the approach to energy, agriculture, industrial metals, and livestock commodity sectors. It is similarly listed on Deutsche Börse (UEQC GY) but also maintains listings on London Stock Exchange (CCUA LN) and SIX Swiss Exchange (CCMCUA SW).

Both ETFs come with an expense ratio of 0.34%.

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