WisdomTree has introduced a new currency-hedged share class for its roll-enhanced energy ETC.
The ETC provides exposure to a basket of six energy sector commodities.
The WisdomTree Energy Enhanced EUR Daily Hedged ETC has listed on Deutsche Börse (WNRG GY). The share class protects against adverse movements in the US dollar/euro exchange rate through a daily currency hedge.
The WisdomTree Energy Enhanced ETC was first launched in February 2019 and has since grown to over $620 million in assets. It is listed on London Stock Exchange (BENE LN) in US dollars and on Xetra (XMWK GY) and Borsa Italiana (BENE IM) in euros.
Both the new currency-hedged share class and the regular share class come with expense ratios of 0.40%.
Product strategy
The ETC is linked to the Optimised Roll Energy Total Return Index which uses futures contracts to track several energy sector commodities as represented by the parent Bloomberg Energy Subindex. As of the beginning of 2021, the target weights for the underlying commodities in the parent index were WTI crude oil (27.2%), natural gas (26.9%), Brent crude (22.8%), gas oil (8.8%), unleaded gasoline (7.2%), and diesel (6.9%).
The index is embedded with a smart roll mechanism that aims to enhance roll yield compared to traditional passive commodity products. It does this by adjusting the rolling strategy based on the shape of the futures curve for each underlying commodity.
Traditional, first-generation commodity indices typically gain exposure via the nearest dated (or front-month) futures contract. This strategy has its limitations, however, especially in markets with steep contango curves (where the forward price of the front-month contract is trading well above the spot price). This forces investors to suffer a significant negative roll yield as they sell their cheaper contracts to buy more expensive ones.
The optimized roll strategy aims to limit potential losses arising from rolling futures contracts in contango markets and maximize the benefit from rolling contracts in backwardation (where the forward price of the front-month contract is trading below the spot price).
Generally, in contango markets, the mechanism will invest further down the curve in longer-dated contracts where the contango effect is usually less pronounced – the curve is flatter and hence the roll returns less negative over time. By rolling the contracts over less frequently, the strategy minimizes the traditionally high compounding costs of monthly rollovers.
According to WisdomTree, the optimized roll strategy has resulted in consistently higher returns and lower risk when compared to the parent Bloomberg Energy Subindex.
Longer-term exposure
Nitesh Shah, Director, Research, Europe, WisdomTree said: “Across energy markets we have some of the most pronounced futures curve slopes out the commodity complex. In 2020 we saw how quickly we can move from a negative slope (backwardation ) to a positive slope (contango ). The optimised approach adapts to these environments quickly by changing the contract exposure, giving it the potential to enhance returns relative to a strategy that remains fixed in one segment of the futures curve”.
Thiemo Storz, Head of German Speaking Regions, WisdomTree: added: “Energy commodities represent a tactical opportunity for many investors. However, an optimised roll mechanism can be supportive for investors seeking a longer-term exposure to energy. Investors with strategic broad commodity allocations already consider the WisdomTree Energy Enhanced to overweight the energy sector, by providing a Euro hedged feature Euro based investors can tap into the full potential of energy price gains which can be missed if held unhedged.”