Index Changes Shift Commodity ETF Exposure

January 09, 2014

iShares’ GSG, a pair of iPath ETNs and other ETFs sit on the front lines of a major S&P Dow Jones Commodities index rebalancing process.

The annual rebalancing of two major S&P Dow Jones commodities indexes are going to result in massive buying of Brent crude oil and gold, and unloading of WTI crude and natural gas in the days ahead. The adjusting exposure should directly impact a roster of ETFs that either track one of these benchmarks directly, or that invest in those specific markets, all of which will be impacted by the move.

In a process that began Wednesday and should go on for five days, according to S&P Dow Jones, the rebalancing of the Standard & Poor’s Goldman Sachs Commodity Index and the Dow Jones-UBS Commodity Index will trigger roughly $2.7 billion in new buying in the Brent market, and some $1 billion in fresh gold demand.

On the flip side, the adjusting exposure will mean the unloading of some $2.8 billion in WTI oil contracts, and about $1.5 billion of natural gas positions, according to S&P Dow Jones. In all, the rebalancing should amount to a $12.4 billion shift in overall exposure.

Gold prices were up slightly Thursday, trading above $1,226 an ounce, Brent oil was slightly up to $107 a barrel, WTO dipped to $92 and natural gas fell to $4.14 /mmbtu.

Among the most impacted, the $1.07 billion iShares S&P GSCI Commodity ETF (GSG | C-94) sits at the front line of this change. The fund, which tracks the S&P GSCI Index and invests in index futures contracts, is roughly 70 percent allocated to energy, including a 26 percent allocation to crude oil and a 22 percent stake tied to Brent oil.

GSG has now slid about 1.2 percent since the beginning of the year, adding to what is now a 5.8 percent decline in the past 12 months.

GSG_DBC_USCI_1_Year_Performance

Chart courtesy of StockCharts.com

Another pair of strategies tracking these indexes include the $100 million iPath S&P GSCI Total Return ETN (GSP | B-95), which tracks the S&P GSCI, and the much-larger iPath Dow Jones-UBS Commodity Total Return ETN (DJP | A-41), tracking the Dow Jones-UBS Commodity Index. DJP has more than $1.6 billion in total assets under management.

There are other funds that could be impacted indirectly if these shifts in allocation end up affecting the dynamics in these commodities markets, or the investor demand for exposure to them.

The $6.4 billion PowerShares DB Commodity Tracking ETF (DBC | B-74), for instance, is one such fund. Tracking the DBIQ Optimum Yield Diversified Commodity Index Excess Return Index, the fund is one of the biggest broad ETFs in the segment, tapping into 14 commodities. More than half of the portfolio is tied to energy, and 6.5 percent is linked to gold.

DBC has now declined 10.09 percent in the past year.

The United States Commodity Fund (USCI | B-52) tracks the equal-weighted SummerHaven Dynamic Commodity Index Total Return, and invests in futures contracts of 14 commodities as well. Brent, for instance, represents slightly more than 7 percent of the $501 million portfolio. USCI has slid 5.6 percent in the past 12 months.

 

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