Barclays Bank PLC rolled out 18 new exchange-traded notes on Thursday, introducing a new suite of products designed to give investors exposure to various commodities. Each of the new ETNs is linked to a Barclays Capital Pure Beta Index, a lineup of benchmarks designed to provide a more representative measure of commodity market returns.
The new ETNs include:
|SBV||Pure Beta S&P GSCI-Weighted ETN|
|BCM||Pure Beta Broad Commodity ETN|
|OLEM||Pure Beta Crude Oil ETN|
|DIRT||Pure Beta Agriculture ETN|
|WEET||Pure Beta Grains ETN|
|CUPM||Pure Beta Copper ETN|
|NINI||Pure Beta Nickel ETN|
|LSTK||Pure Beta Livestock ETN|
|ONG||Pure Beta Energy ETN|
|HEVY||Pure Beta Industrial Metals ETN|
|SGAR||Pure Beta Sugar ETN|
|GRWN||Pure Beta Softs ETN|
|BLNG||Pure Beta Precious Metals ETN|
|LEDD||Pure Beta Lead ETN|
|CTNN||Pure Beta Cotton ETN|
|CAFE||Pure Beta Coffee ETN|
|CHOC||Pure Beta Cocoa ETN|
|FOIL||Pure Beta Aluminum ETN|
iPath already offers ETNs covering each of these commodities and commodity families. The new additions will be distinguished by the manner in which the underlying index achieves exposure to the related commodity or group of commodities. Most commodity indexes “roll” exposure at a pre-determined time, selling contracts approaching expiration and buying longer-dated futures in order to avoid taking physical delivery. The Pure Beta indexes have the ability to roll into futures contracts with different expiration dates, using a rules-based methodology to select the securities that mitigate the effect of contango and backwardation and the effects of futures contract price distortions in the commodity markets [see ETF Ideas For Contango Free Commodity Exposure].
The Pure Beta allocation methodology consists of four steps:
- Front Year Average Price (“FYAP”): The average price weighted by the open interest of the first 12 futures contracts, this metric is calculated as a measure of a commodity’s economic value.
- Tracking Error: Each futures contract is ranked according to how closely it tracks the FYAP.
- Liquidity Filter:To ensure tradability, contracts that don’t maintain sufficient volume are filtered out.
- Dislocation Filter: Certain contracts subject to price distortions due to short term supply and demand factors (such as severe weather conditions) are filtered out.
Each month, an allocation is made to one futures contract per commodity that is deemed to be most representative of the returns for that commodity.
“The new iPath ETNs linked to the Pure Beta Indices demonstrate Barclays Capital’s commitment to providing innovative solutions for investors,” said Waqas Samad, Head of Index, Portfolio, and Risk Solutions. “The Pure Beta Indices are unique among commodity indexes as they seek to identify potential market distortions in their dynamic selection of futures contracts and offer scalability as a result of their liquidity filters.”
Battle Vs. Contango
The new iPath products are the latest ETPs designed to offer exposure to commodity products while minimizing the impact of contango on fund returns. Many of the “first generation” of commodity ETPs focus exclusively on front month contracts, rolling holdings as frequently as once per month. When market are contangoed–meaning longer-dated contracts are more expensive than those approaching expiration–this strategy can effectively result in selling low and buying high. That results in commodity ETFs lagging behind a hypothetical return on spot prices. While that disconnect is simply a function of the investment objective methodology, many investors have mistaken it for a flaw in commodity ETFs, and expressed frustration with these products.
Several commodity ETPs have been structured to combat the potentially adverse impact of contango:
- PowerShares and Deutsche Bank have teamed up on a suite of commodity product linked to “Optimum Yield” benchmarks. Instead of simply investing in near month contracts, those indexes utilize a proprietary methodology to identify the contracts that will generate the highest roll yield [see Under The Hood Of Optimum Yield]. This strategy has a lot in common with the new iPath ETNs, but there are some differences. The PowerShares products attempt to maximize roll yield, whereas the Pure Beta Indices seek to eliminate it (essentially, the PowerShares funds will seek to maximize the benefit of contangoed markets, whereas the iPath ETNs will focus on minimizing the impact the slope of the futures curve has on returns).
- Teucrium offers a suite of ETPs that includes a Corn Fund (CORN), Natural Gas Fund (NAGS), and Crude Oil Fund (CRUD). Each of those products spreads exposure to futures contracts across multiple maturities. The Teucrium products are designed to reduce the cost of rolling exposure compared to funds that hold only a single month [see Talking Contango And Commodity ETFs With Sal Gilbertie].
- The United States Commodity Index Fund (USCI) has been hailed as a “contango killer,” as this product constructs a diversified basket of commodity futures using a rules-based methodology that includes selecting natural resources for whom the market is backwardated or exhibiting only moderate contango.
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Disclosure: No positions at time of writing.