Evaluating 'Better Beta' In Commodity-Related Funds

February 07, 2013



Other, newer options include the Stream S&P Dynamic Roll Global Commodities ETF (NYSEArca: BNPC) and the RBS Rogers Enhanced Commodity ETN (NYSEArca: RGRC).

These funds have done slightly better than DBC against front-month versions of their indexes, but USCI is the only one to actually beat the front-month version of its index—or at least, earn back most of its expense ratio.

I used the same methodology as described above to construct a front-month "index" based on USCI's holdings, but using USCI's commodity weights at the beginning of each month. USCI, to pick more promising commodities, can and often does change its holdings every month.

USCI only lagged the front-month version of its index by 25 basis points in 2012, earning back most of its 95-basis-point expense ratio.

USCI vs Front Month USCI

The ETFs that track dynamic versions of the GSCI also don't differ that much from the GSCI—GSC underperformed the GSCI by about 1.6 percentage points and the iPath Pure Beta S&P GSCI-Weighted ETN (NYSEArca: SBV) underperformed it by about 1.7 percentage points. They're not earning their expense ratios, but they're also not losing much more money than their expense ratios would suggest.

GSCI based funds vs GSCI

It should be noted that the analysis I've done here focuses on just one year, and the funds highlighted above may do a better job of managing roll yield in other years.

It's clear, however, that it would be foolhardy to assume that just because a fund is actively managing its contract selection means that it is adding value by doing so.

Roll yield is also just a part of commodity returns, and can sometimes be a relatively small component of overall returns. After all, DBC was the top-performing fund of the bunch in 2012.

Commodity selection still matters a lot. Just be sure that you're going into your fund of choice with open eyes.

At the time this article was written, the author held a position in DBC. Contact Carolyn Hill at [email protected].



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