Ever wanted to invest in live cattle, coffee and gold in the same place? The chance to do that – and invest in another 21 of the world’s most in-demand commodities – is being offered by a new iShares ETF.
Fund giant BlackRock’s iShares Diversified Commodity Swap UCITS ETF, aims to invest in commodities that have a wide effect on the global economy.
It will follow the Bloomberg Commodity Total return Index, which represents energy, agriculture, industrial metals, precious metals and livestock sectors and is designed to deliver a broad exposure with no single commodity or sector dominating.
The iShares ETF will track an index where 24 different commodities are eligible from energy, to agriculture, industrial metals, precious metals and livestock sectors – including live cattle
BlackRock, the world’s biggest fund manager, with $5.7trillion (£4.26trillion) of assets under management, said the ETF was created in response to growing demand for portfolio diversification and commodities.
That means that rather than following the path of many commodity ETFs, which target just one commodity or sector, it spreads investors’ cash across a range of those considered to be the most important – with ongoing charges of just 0.19 per cent.
The 24 commodities eligible for inclusion in the ETFs benchmark index currently are: aluminium, cocoa, coffee, copper, corn, cotton, crude oil, gold, ultra-low-sulphur diesel, lead, lean hogs, live cattle, natural gas, nickel, platinum, silver, soybean meal, soybean oil, soybeans, sugar, tin, unleaded gas, wheat, and zinc.
Here is what you need to know about iShare’s eleventh ETF launch of the year.
What does the ETF invest in?
The iShares Diversified Commodity ETF falls under the exchange traded commodities (ETC) banner as it is designed to track the performance of a commodities index.
It will hug the Bloomberg Commodity USD Total Return Index, known as BCOM, so investors should expect nigh identical performance. Of course there is always a possibility of tracking error – where a tracker fails to accurately follow the index – although this is normally only marginal.
This index can currently contain 24 different commodities, which are then put into groups: Energy (crude oil, ULS diesel, natural gas, unleaded gas), Precious Metals (gold, platinum, silver), Industrial Metals (aluminium, copper, lead, nickel, tin, zinc), Livestock (live cattle, lean hogs), Grains (corn, soybeans, soybean oil, soybean meal, wheat), and Softs (cocoa, coffee, cotton, sugar).
The index is weighted on production of the underlying commodities, so the higher the volume, the higher the weighting of that commodity in BCOM. Caps are placed on how much of any individual commodity (15%), its derivatives (25%), or a group (33%) can make up of the index – to avoid it becoming too skewed towards one thing.
The ETF commands a ongoing charges of 0.19 per cent and will trade under the ‘ICOM’ ticker.
The BCOM index that the ETF tracks has suffered over the past five years, as commodity prices have struggled. It is down 41 per cent over five years, but the biggest falls were seen between 2012 and 2016. Over one year BCOM is up 0.33 per cent and in the year-to-date it is down 3.91 per cent.
The Bloomberg Commodity USD Total Return Index, known as BCOM, has suffered over the past five years as commodity prices have fallen
How does it invest?
The fund doesn’t physically hold the assets, but unlike with an equity or bond ETF, this is not so much of a concern – as there are obvious practical reasons not to own what it invests in.
‘It makes sense to access some commodities in this way – after all you wouldn’t want to store live sheep the same way you store gold,’ Adrian Lowcock, investment director at multi-manager investment firm Architas said.
Instead, the fund uses unfunded total return swaps to achieve this exposure. This is a widely used form of credit derivative – a way of replicating an asset, where the risk of a default is sold to a party other than the lender.
The swap allows the fund to gain exposure and reap the benefits from an asset without actually owning it.
BlackRock claims this is more practical than holding physical commodities such as precious metals or livestock.
The swap fees are treated as portfolio transaction costs, and are therefore excluded from the ongoing charges figure. The weighted average swap fee was 0.1 per cent as at 25th July 2017.
Fancy some gold with your cattle? The iShares ETF invests in a broad range of commodities
How does the commodity ETF compare?
The former has an ongoing charge of 0.37 per cent while the latter is levied at 0.40 per cent, so the iShares ETF is cheaper.
What iShares says
Fergus Slinger, co-head of iShares Sales EMEA, said: ‘Diversification is becoming more difficult to achieve due to increasing correlation between equities and bonds across global markets.
‘This fund is a direct response to growing investor appetite for asset classes that offer stronger diversification impact in portfolios, and many are looking to commodities. ‘
As well as passive trackers, investors can consider the active fund management route, where a fund manager and his or her team of investment experts cherry picks securities with the aim of outperforming the market.
Actively managed funds are typically more expensive though. They also tend to focus on a particular commodity rather than offering exposure across the sector.
The top three performing actively managed commodity funds according to data by investment research firm FE Analytics are BlackRock GF New Energy D2 USD, Pictet Water I dy GBP and Pictet Timber I dy GBP. They boast five-year returns of 101 per cent, 96 per cent and 87 per cent respectively.
Lowcock said: ‘The ETF invest in a range of commodities but they have fundamentally different drivers for their performance that trying to navigate the whole market would be better done through an active manager or a variety of funds.’
This is Money verdict
Investing in commodities is considered a higher risk endeavour. Prices are determined by both demand and supply and sentiment – and can be very volatile.
However, they can also be considered an important way of diversifying a portfolio that also holds shares, bonds and property.
By investing in a very broad commodity ETF, such as the iShares Diversified Commodity one, you will not benefit from any sudden spikes in the price of an individual commodity – but you will spread your risk and face less chance of a sudden slump in one commodity hitting you hard.
The other risk with an investment such as this is that the movements of the commodities cancel each other out, with some going up and some going down and your investment failing to grow.
On the other hand, you may believe that the world’s growing population’s demand for its resources will drive prices of commodities up over time across the board.
Adrian Lowcock, investment director at multi-manager investment firm Architas, said: ‘Whilst correlation between ETCs may be rising in the short term, over the medium and longer term they have largely been uncorrelated and I would expect that to remain.’
He added the mix of commodities in the iShares ETF is likely to offer less volatile exposure to the sector.
‘This will avoid the big peaks and troughs whilst the maximum limits on each sector and individual commodities would also force the ETF to rebalance if an asset class performed too strongly relative to the others.’
ETCs can be a cheap and easy way of getting exposure to commodities in your portfolios. And because ETCs are traded like shares, you can trade them throughout the day with live pricing.
It is also worth noting that there is no stamp duty to pay when you invest in ETCs or any other ETFs.
Like many other ETCs, the iShares ETF use swaps which is subject something called counterparty risk. Essentially, investors run the risk of losing their money if the issuer of the derivative – i.e. the counterparty – is for whatever reason unable to make payments under the terms of the swap agreement or goes bust.
If this happens you will not be protected by the Financial Services Compensation Scheme safety net which covers investors in regulated products up to £50,000.
The risks involved with this type of investment are not the easiest to digest so make sure you do your research before piling into such a strategy or consult a financial adviser.
Three of the best commodity ETFs
Lowcock is an advocate of the iShares Physical Metals plc, Physical Gold which owns the gold it invests in and trades in dollars. He describes it as a ‘simple gold product’ that runs at a low cost. The ongoing charges for the product is 0.25 per cent.
He also highlights the iShares Inc MSCI Global Metals & Mining Producers. The ETF tracks the equity performance of companies in both developed and emerging markets that are primarily involved in the extraction and production of diversified metals excluding gold and silver like aluminum and steel. The ongoing charges for the product is 0.39 per cent.
Lowcock also recommends ETFS Commodity Securities Agriculture which uses total return swaps to replicate exposure to the sector.
He said: ‘The fund looks to get exposure to an index of agricultural products so should give the sector exposure without specific volatility of individual products,’ he said. The ongoing charges for the product is 0.49 per cent.