The latest entrant in the ETF industry is French banking giant BNP Paribas. The French bank has launched an exchange-traded commodity fund that is based on a contango-fighting strategy, i.e. it tries to minimize negative impact of the roll process when futures markets are in contango while maximizing yields from rolling futures contract when the market experiences backwardation.
The BNP Paribas STREAM S&P Dynamic Roll Global Commodities Fund (BNPC) will replicate the broad-based commodities futures index, the S&P GSCI Dynamic Roll Excess Return Index, which uses a flexible methodology that rebalances the portfolio depending upon market conditions.
The benchmark index includes two dozen commodities including many products from energy, precious metals, base metals, grains and livestock with a major bias in the energy sector. Brent Crude and WTI Crude nearly make up for half of the portfolio (48 percent) with gasoline, heating oil and natural gas making up another 20 percent.
The rest 30 percent of the portfolio will comprise of gold, wheat and corn. The energy products – the WTI Crude and Brent Crude contracts are long maturity products and don’t mature Dec. 2013 and Dec. 2014, respectively.
To maximize yields, BNPC holdings will swing between short-term futures contract and longer maturity contracts. Since the effect of contango is generally amplified at the shorter end of the maturity curve, increasing bias towards the longer-dated contracts is considered an effective strategy to minimize the roll-yield.
Conversely, when markets are in backwardation, rolling futures contracts frequently helps in generating higher yields.
The benchmark S&P GSCI Dynamic Roll Excess Return Index rebalances itself with more longer-dated futures contracts when markets are in contango, thus reducing the roll frequency and the associated rolling losses that arise from rolling long futures contracts, to boost yields. On the other hand, BNPC will hold more front-month futures contracts when the commodities futures markets are in backwardation.
It’s an interesting concept that needs some time to prove itself. Right now, this ETF is brand new and has no price history from which I could draw comparions to other commodity funds. I’ll revisit this idea again in the future once BNPC has established itself.
Disclosure: No holdings
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