Sizing Up Broad Active Commodity ETFs

September 29, 2016

PDBC Uses ‘Optimized’ Strategy

These two ETFs also pick their exposures a little bit differently. PDBC is an "optimized" strategy that picks futures contracts deliberately in an effort to mitigate contango. The fund focuses on maximizing roll yield.

“One component of the fund’s total returns is roll return, generated by rolling from a short-term futures contract to a longer-term futures contract. Roll return, impacted by the shape of the futures curve, is negative when the markets are in contango,” PowerShares said of the fund.

“Conventional commodity indexes tend to implement a rigid front-month-only roll process, where the index simply rolls to the next available contract. The optimum yield formula replaces expiring futures contracts with new contracts expiring in the month that will generate the highest “implied roll yield,” the firm said.

FTGC Screens For ‘Stable Risk Profile’

FTGC, meanwhile, looks to maximize returns with an eye on risk management. The fund, in essence, offers investors a low-volatility, or a contained-volatility, exposure to commodities, much like what the iShares Edge MSCI Min Vol USA ETF (USMV) is to equities.

The goal, in the end, is to pick different commodities looking at expected volatility. That, in turn, typically means a lower-beta exposure that offers less downside, but also less upside relative to other strategies. “The commodity futures selected for the portfolio are those with a realized volatility profile that the advisor believes is far more stable than traditional portfolio construction approaches,” First Trust says of the fund.

In 2016, that focus on managing volatility led FTGC to trim exposure to oil earlier in the year when that market became more volatile, and also to invest in assets such as cattle and lean hogs that have been a drag on returns. These decisions didn’t help boost FTGC’s total returns, but fulfilled the role of delivering investors a smoother ride. The YTD chart above shows just how much smoother FTGC’s performance trajectory has been relative to PDBC.

Costs Also Matter

FTGC costs about twice what PDBC charges in expense ratio.

It’s worth noting that FTGC’s notable underperformance so far in 2016 relative to PDBC isn’t a given. In 2015, FTGC declined 22% as commodities tanked, but PDBC plunged nearly 27%—making FTGC the stronger performer last year.

Going forward, investors now have more options in this segment. Elkhorn launched this month two commodity broad-market strategies that would compete with these funds.

The Elkhorn Commodity Rotation Strategy ETF (DWAC) costs 0.99% in expense ratio, and the Elkhorn Fundamental Commodity Strategy ETF (RCOM) costs 0.75%.

Contact Cinthia Murphy at [email protected]

 

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