Two major variables are predictors of commodity index
returns:commodity weights and futures contract selection.
The major commodities indexes-the Deutsche Bank Liquid
Commodities Index (DBLCI), Dow Jones-UBS Commodities Index (
), S&P GSCI Index (GSCI), Thomson Reuters Equal Weight
Continuous Commodities Index (
), SummerHaven Dynamic Commodity Index (SDCI) and the Rogers
International Commodity Index (RICI)-all have wildly different
A commodities index that limited its exposure-rolling system to
the next-month contracts would lose money at roll time, while one
that optimized its rolling system to minimize the effects of
contango, or, where applicable, maximize backwardation, would
profit. Which brings me to my point …
Why is anybody still investing in front-month commodities ETFs?
I ask, because they are, and in a big way.
Two of the most popular commodities exchange-traded products
offer front-month exposure. They are the iPath Dow Jones-UBS
Commodity Total Return ETN (NYSEArca:DJP) and the iShares S&P
GSCI Commodity ETF (NYSEArca:GSG), and they have $2.46 billion and
$1.44 billion in assets, respectively.
Of course, the DJ-UBS and GSCI indexes are long-standing,
well-established funds, so I understand why investors are attached
They each offer unique portfolios-DJ-UBS uses a proprietary
rules-based methodology to select and weight its commodities, while
the GSCI chooses its commodities based on the liquidity of their
futures contracts and weights them based on the production of each
But what if you could keep the commodities selected by your
chosen index, in the weights specified by the index provider, while
also optimizing the selection of futures contracts to maximize roll
You can, but the idea hasn't really caught on.
The next-generation iPath Pure Beta S&P GSCI-Weighted ETN
(NYSEArca:SBV) does just that with the same S&P GSCI Index, and
yet, surprisingly enough, it hasn't picked up many assets since its
launch in April 2011. Its $5 million in assets really looks puny
next to GSG's $1.44 billion.
Deutsche Bank has a series of commodities indexes-dubbed
"Commodities Boosters"-that replicate the selection and weighting
of the DJ-UBS Commodities Index and the S&P GSCI, as well as
subindexes of those two broad indexes that focus on agriculture and
energy, among others.
The Deutsche Bank Commodity Booster linked to the DJ-UBS index
outperformed the standard DJ-UBS index by nearly 15 percent over
the past five years, seemingly due to futures contract selection
Roll optimization gets more important as commodities with high
weights within an index go into steeper contango.
As you can see from the two graphs above, the roll-optimized
ETFs really pulled away from the traditional indexes in late
2008/early 2009-right when crude oil moved into steep contango.
Crude oil currently makes up nearly half of the GSCI, so it's not
surprising that the difference is more pronounced in the GSCI.
That said, the Deutsche Bank Commodity Booster indexes are
currently only tracked by European-listed ETFs. Here's to hoping
they make it over to U.S. exchanges sometime soon.
Until then, the PowerShares DB Commodity Index Tracking Fund
(NYSEArca:DBC) will do just fine. DBC uses the same optimum yield
futures contract selection process, albeit on a different set of
commodities than the GSCI and DJ-UBS indexes mentioned above.
DBC consistently outperforms competitors like GSG and DJP --
over the past three years, it has returned 51.2 percent, compared
to GSG's 45.1 percent and DJP's 35.8 percent.
iPath's suite of Pure Beta ETNs are also good options for
mitigating the effects of contango or taking advantage of
commodities in backwardation.
My point is this:If you're still investing in a front-month
rolling ETF, there are better options out there, and I encourage
you to explore them.
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