Smart beta exchange-traded funds (ETFs) have become a staple in many portfolios. While many investors are focused on smart beta equity ETFs, these funds target many different asset classes with strategies designed to reduce risk and/or enhance returns.
Smart beta commodity ETFs, for example, let investors tap into sophisticated strategies designed to improve risk-adjusted returns compared to traditional index-based commodity ETFs.
In this article, we’ll look at smart beta commodity ETFs, how they compare to traditional funds and other important considerations for investors.
Commodity Smart Beta ETFs
Most commodity ETFs provide exposure to commodities through futures contracts or – in some cases – physical assets. The most popular underlying index for commodity ETFs is the S&P GSCI, which is production-weighted to represent the global commodity market. The problem with this approach is that it overweights certain commodities, such as crude oil (~50%), and underweights other commodities, like wheat and corn (< 7%).
Contango presents another problem with conventional commodity ETFs that use futures contracts. When a market is in contango, the futures price of a commodity is greater than the market price of the commodity. Commodity ETFs that only own futures contracts in the current month risk losing money when markets are in contango since they must buy higher priced futures contracts and sell cheaper spot month contracts.
Smart beta commodity ETFs enable investors to adjust their exposure to commodities beyond the simple production-based approach and address contango. For example, the Greenhaven Continuous Commodity ETF (GCC ) equally weights 17 different commodities to provide exposure to all of them, while others have rolling futures contract strategies. These twists on traditional weighting could help improve returns and/or limit risk.
Some of the most popular smart beta commodity ETFs include:
| Name | Ticker Symbol | Expense Ratio | Strategy |
|---|---|---|---|
| Greenhaven Continuous Commodity ETF | (GCC ) | 0.85% | Equal weighting of a basket of 17 commodities. |
| PowerShares DB Commodity Tracking ETF | (DBC ) | 0.93% | Production-based weighting with caps on energy, while mitigating contango. |
| United States Commodity Fund | (USCI ) | 0.80% | Equal weighting of the top seven commodities based on price momentum. |
| GS Connect S&P GSCI Enhanced Commodity TR Strategy ETN | (GSC ) | 1.25% | GSCI weighting with a modified futures contract rolling schedule to mitigate contango. |
| iPath Pure Beta Broad Commodity ETN | (BCM ) | 0.70% | Five sectors and ten commodities with a unique roll structure to mitigate contango. |
| iShares Commodity Optimized Trust | (CMDT ) | 0.75% | Basket of 20 commodities in a way that minimizes backwardation and contango. |
| Credit Suisse X-Links Commodity Rotation ETN | (CSCR ) | 0.85% | Equal weighting of eight commodities with the most backwardation (e.g. have the most scarcity). |
How Do They Compare?
The most popular commodity ETF benchmark is the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG ) that uses the S&P GSCI as its underlying index. In the chart and table below, we compare this benchmark ETF with smart beta commodity ETFs to see how their performance compares over multiple time periods.
| Ticker | 1-Year | 3-Year | 5-Year | 10-Year |
|---|---|---|---|---|
| (GSG ) | -3.80% | -22.26% | -15.08% | -10.04% |
| (GCC ) | 3.70% | -9.18% | -9.12% | N/A |
| (DBC ) | 7.19% | -15.83% | -11.26% | -4.52% |
| (USCI ) | 1.98% | -9.24% | -7.07% | N/A |
| (GSC ) | 1.24% | -21.76% | -15.03% | N/A |
| (BCM ) | 6.80% | -12.09% | -9.68% | N/A |
| (CMDT ) | 6.91% | -11.25% | N/A | N/A |
| (CSCR ) | 9.21% | -10.62% | N/A | N/A |
In addition to total returns, investors should consider risk and volatility factors when making decisions. The high energy industry exposure of GSCI-weighted ETFs may be great when crude oil prices are on the rise, but they expose investors to far greater risk to crude oil prices than equal-weighted funds. These dynamics are apparent in the chart above where GSG underperformed equal weight alternatives like GCC during the 5-year period.
The Bottom Line
Commodities represent an area of the market where smart beta ETFs could deliver exceptional value to investors. Investors may want to consider using ETFdb’s ETF Screener to identify smart beta alternatives to conventional commodity ETFs to mitigate contango and increase diversification. Of course, investors should also consider several other factors before purchasing these ETFs, such as their often higher expense ratios.
Further Reading
For more information, see the following resources.
- How Smart Beta Affects Other Asset Classes – Part 1
- How Smart Beta Works for Fixed Income ETFs – Part 2
- How Smart Beta Works for Real Estate ETFs – Part 4
For a complete list of smart beta ETFs, see ETFdb’s Smart Beta ETFs list.
