WisdomTree unveils two roll-enhanced commodity ETPs

Feb 27th, 2019 | By | Category: Commodities

WisdomTree has launched two new exchange-traded commodities on the London Stock Exchange, providing exposure to baskets of commodity futures from the industrial metals and energy sectors.

Christopher Gannatti, WisdomTree Head of Research in Europe

Christopher Gannatti, WisdomTree Head of Research in Europe.

The Boost Enhanced Industrial Metals ETC (META LN) and Boost Enhanced Energy ETC (BENE LN) are linked to ‘optimized roll’ indices embedded with a smart roll mechanism based on the S&P GSCI Dynamic Roll Indices.

The mechanism aims to enhance the roll yield compared to traditional passive commodity products by adjusting the rolling strategy based on the shape of the futures curve for each underlying commodity.

The starting weights for the ETCs are set to target the weights of the relevant Bloomberg Sector Subindex.

The Bloomberg Industrial Metals Subindex currently consists of futures contracts in copper (41.2%), aluminium (23.9%), zinc (18.7%), and nickel (16.2%), while the Bloomberg Energy Subindex consists of WTI crude oil (26.5%), natural gas (25.7%), Brent crude (24.4%), gas oil (8.9%), unleaded gasoline (7.3%), and heating oil (7.2%).

By utilizing futures to obtain exposure to commodities, investors are able to avoid the storage and transportation costs associated with direct physical investment in this asset class.

Traditional commodity indices typically gain exposure via the nearest dated futures contract or front-month 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 Commodity Subindices.

Christopher Gannatti, Head of Research in Europe, commented, “The roll in these ETCs substantially mitigates the costs of holding commodity futures contracts and this can potentially reduce the volatility of returns. This removes one of the main barriers to having a long-term allocation to commodities.”

Rafi Aviav, Head of Product Development, added, “We are the leading provider of ETCs in Europe, with 31% market share. We are committed to providing comprehensive solutions for investors and these new products add even more breadth to our commodity offering. We have an existing smart beta approach to broad commodity investments, and we are delighted to extend this approach to individual sectors, ensuring investors can tailor their portfolio to suit their needs.”

Both ETCs trade in US dollars and come with total expense ratios (TERs) OF 0.40%. They are also available to trade in euros on Borsa Italiana (Tickers: META IM; BENE IM).

Due to historically low correlations between commodities and major asset classes, the ETCs may enhance the risk/return profile of traditional stock/bond portfolios.

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