Shopping Across ETF Legal Structures

May 21, 2018

True to their mandate, the ETN NAVs reflect the returns of the indexes tracked, minus expense ratios, within 1 basis point. This ETN structure allows for excellent index tracking. Note that Barclays iPath ETNs have been excluded from this analysis, because iPath ETNS historically used path-dependent expense ratio calculations.

The commodity pools and open-ended funds did not track their indexes as well as the ETNs. All underperformed their expense ratio-based predictions, though the commodity pools delivered less of a gap than the actively managed open-ended funds. In the cases where both commodity pools and open-ended funds tracked the same index, the results were mixed. The PowerShares DB Optimum Yield trackers delivered results within 0.04% of each other, while the GSCI tracker ETFs showed a clear advantage for the ’40 Act structure.

Looking at the wider commodity ETF landscape, we can extend this analysis, and include grantor trusts. A comparison of 35 commodity-tracking ETFs with available total-return index data showed the patterns of the same-index examples held. Grantor trusts and ETNs tracked their indexes within 0.01% of their expense ratios, while commodity pools and open-ended funds posted bigger gaps. While commodity pool gaps were smaller, their higher overall expense ratios drove their overall tracking difference higher.

 

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The difference between the commodity pool and open-ended funds might surprise some, as both structures require significant trading activity in the futures market, in addition to managing margin accounts and collateral investment. Interestingly, FactSet’s calculated commodity pool expense ratios include estimates of brokerage and creation costs, while the open-ended funds do not, as trading cost estimates are not provided in traditional ’40 Act prospecti.

A bit of caution is warranted in interpreting these results, as most of the actively managed open-ended funds have short histories. Tracking difference could well approach that of the commodity pools as time passes. At present, though, the open-ended funds look to be the better deal in comparison to commodity pools. Yet both seem inefficient in comparison to ETNs and grantor trusts.

Tracking difference, calculated properly using total return NAVs and index levels, allows investors to make apples-to-apples comparisons between legal structures in the commodity space. This holding cost analysis—along with an assessment of trading costs and tax treatment—allows for a total cost of ownership calculation.

At the time of writing, the author held no positions in the securities mentioned. Elisabeth Kashner is director of ETF research and analytics for FactSet.

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