When it comes to investing in commodities through a broad-market ETF that’s actively managed, choices are few. But the wide dispersion in returns among them this year makes the choice an important one.
Today there are only six actively managed commodity ETFs on the market. Only four of those six compete in the broad-market category, and of those four, only two have been around for a while—the other two just launched this month.
So, if you own an active broad commodity ETF today, you probably own one of the two following funds:
- The PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (PDBC), which has $340 million in assets. PDBC costs 0.60% in expense ratio and trades with an average spread of 0.17%, putting total cost of ownership of this fund around $77 per $10,000 invested.
- The First Trust Global Tactical Commodity Strategy Fund (FTGC), which has $239 million in assets and costs 0.95% in expense ratio. The fund trades with an average spread of 0.20%, so owning this fund annually costs about $115 per $10,000 invested.
Both are broad commodities strategies. Both are actively managed. But year-to-date, their performances couldn’t be less similar. PDBC is up almost five times as much as FTGC, with gains of 10.6% so far in 2016—one of the best-performing broad commodities ETFs this year—while FTGC is up 2.5% in the same period, sitting among the bottom performers.
Chart courtesy of StockCharts.com
What’s more, both active funds are underperforming the passive PowerShares DB Commodity Index Tracking Fund (DBC), the largest and most liquid commodities broad market ETF, with $2.3 billion in assets and PDBC’s passive “sister fund” if you will.
Sector Allocations The Difference
What’s behind the 8-percentage-point performance difference in 2016 between PDBC and FTGC? Sector allocations have something to do with it.
PDBC allocates most heavily to gasoline, heating oil, Brent crude and WTI crude, and natural gas, which, combined, represent roughly 50% of the portfolio. It’s an energy-heavy fund.
One of the PDBC’s largest allocations, to Nymex NY Harbor heating oil futures expiring in June 2017, is up 10.5% year-to-date. This position alone represents more than 11% of the portfolio.
By comparison, FTGC allocates only about 2% to heating oil. FTGC’s biggest allocations are to metals: gold, nickel and silver. Together, they represent about 30% of the fund—or more than twice the allocation in PDBC, which doesn’t even include nickel in its mix.
Exposure to agricultural commodities is also different, at about 24% in PDBC versus 30% in FTGC—some of these markets are at multiyear lows.
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.
Contact Cinthia Murphy at [email protected]