WisdomTree lists unhedged roll-optimised commodity ex-agriculture ETF

Oct 12th, 2021 | By | Category: Commodities

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WisdomTree has introduced an unhedged version of its roll-enhanced broad commodity ex-agriculture ETF.

Nitesh Shah Director Research WisdomTree

Nitesh Shah, Director of Research, Europe, at WisdomTree.

Listed on the London Stock Exchange and Xetra, the WisdomTree Enhanced Commodity ex-Agriculture UCITS ETF (WXAG LN / WAXG GY) provides a broad and diversified commodity exposure, excluding agricultural commodities.

The fund is swap-based and referenced to the Morgan Stanley RADAR ex Agriculture & Livestock Commodity Total Return Index.

It comes with a management expense ratio of 0.35% and an annual swap rate of 0.25%.

WisdomTree listed a EUR-hedged share class of this fund on Xetra in July.

The underlying Morgan Stanley index reflects the performance of a dynamic roll strategy on commodity futures covering the energy, industrial metals and precious metals sectors, each of which is equally weighted.

The index is a composite of 15 individual commodities represented for all but platinum and palladium by S&P GSCI Dynamic Roll Indices that are designed to take advantage of the shape of individual commodity futures curves.

Regular commodity indices generally use only near-month futures contracts. As these futures approach expiration, they are replaced by contracts that have a later expiration in a process referred to as ‘rolling’. If the market for these contracts is in ‘backwardation’ (downward future curves), the purchase of the new contract takes place at a price that is lower than the sale price of the expiring contract. Conversely, if the market for these contracts is in ‘contango’ (upward future curves), the purchase of the new contract takes place at a price that is higher than the sale price of the expiring contract. The difference between the prices of the two contracts is the ‘roll yield’.

The presence of contango in the commodity markets can result in negative roll yields, while the presence of backwardation can result in a positive roll yield.

Unlike traditional indices which generally remain invested in near-month futures contracts, the S&P GSCI Dynamic Roll Indices use an optimised roll mechanism for determining their positioning. The aim of this mechanism is to minimise the potentially negative effect of rolling futures contracts by determining the most efficient roll on the future curve for each commodity.

In a market trading in contango, the mechanism aims to minimise the roll cost. In a backwardated market, the mechanism aims to maximise the roll yield. It achieves this by selecting the most favourable contract to hold according to a rule-based formula.

While the tenor of the contracts varies, the target weight of each individual commodity is static and ranges between 1.69% and 10% depending on their supply and demand characteristics. Commodities with a higher expectation to be in backwardation receive a higher target weight.

The index is rebalanced on a quarterly basis.

Commenting on the launch, Nitesh Shah, Director of Research, Europe, WisdomTree said: “We are currently in a supportive environment for commodities. As the global economic recovery begins to take shape and supply tightens across some raw materials, we have seen many commodities experience strong price gains in 2021 with some hitting multi-year highs.”

According to WisdomTree, net flows into broad commodity ETPs globally stand at $10.2 billion year to date, and adding exposure to commodities has become an increasingly important feature in the investment landscape as investors become more aware of the importance of raw materials in supporting global economic growth.

Alexis Marinof, Head of Europe, WisdomTree, added: “Investors continue to be concerned with inflation and are seeking dynamic strategies to help them navigate financial markets. WXAG builds on our range of enhanced commodities strategies and complements a EUR hedged share class of this ETF already available to European investors who do not want exposure to agriculture and livestock but still want an enhanced commodities strategy.”

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