2013 has been a pretty rough year for commodities across the board. A strong dollar, weakened demand from China, and a still sluggish global economy have conspired to send natural resource prices lower to begin the year.
However, some are remaining optimistic on the space thanks to a decent recovery in the U.S., and some encouraging signs in a few key corners of the market, like certain precious metals and a few agricultural commodities. These natural resources are also great portfolio diversifiers, something that is increasingly important now that international markets are struggling and bonds are slumping as well.
Given this, another look at commodity ETFs like DBC, GSG, or USCI may be warranted by investors as we push into the summer months. Or if these funds do not strike you as good choices, a look to some of the freshly launched ETNs from Credit Suisse could be an interesting way to go instead (see Is USCI the Best Commodity ETF?).
New Commodity Products
These new ETNs from Credit Suisse look to give investors fresh approaches to target the commodity world, focusing on different ways to target the futures curve in order to generate outperformance over traditional benchmarks. The approach may be worth looking into, though many investors have stayed away from ETNs by and large so far.
Still, for investors seeking a new play on commodities either of these could be worth a closer inspection thanks to their relatively novel methods for establishing exposure in the space. So, if you are seeking a new commodity play, we have highlight some of the key details below from these new products, either of which could be interesting choices for commodity investors seeking to get into the space on the dip:
Credit Suisse Commodity Rotation ETN: CSCR
This senior unsecured debt security is linked to the Credit Suisse Commodity Backwardation Total Return Index. This benchmark is along only index that follows a rules-based strategy to select eight commodities from a basket of 24 eligible commodities (also read Tough Times Ahead in Commodity Currency ETFs?).
Commodities are selected for inclusion based on observed levels of backwardation and contango, as measured by one month, and generally six month levels. Each month, eight of the 24 that have the highest backwardation or the lowest contango, subject to maximums for sectors, are included in the benchmark.
Each of the eight commodities receive a 12.5% weighting in the product, following futures contracts spread over the 4, 5, and 6 month versions. At time of writing, the fact sheet suggested that energy and agricultural commodities took up roughly 30% each, while livestock and precious metals taking the rest and base metals not receiving any allocation at this time.
With this process, the ETN looks to outperform traditional benchmarks, as backwardation can indicate scarcity. Plus, a commodity investment in a contangoed environment creates a bit of a roll yield hurdle, so performance can be better by avoiding this type of commodity contract (read Most Surprising ETF Winner in this Slump? Commodities).
Still, investors should note that the product has an elevated cost of 85 basis points a year, while volume might be a bit light. This could increase bid ask spreads, and push total costs of this note even higher.
Credit Suisse Commodity Benchmark ETN: CSCB
For a different approach to the commodity market, investors now have this ETN which is linked to the Credit Suisse Commodity Benchmark Total Return Index. This looks to provide monthly rebalanced, long-only exposure to commodities through rolling futures contracts on 34 different products.
Commodities are included to reflect overall global commodity exposure, so there is a bit of concentration in certain product types. For example, energy commodities make up over half the note, while agricultural and industrial metals each get double digits, leaving roughly 7.5% for precious metals and 4% for livestock.
The uniqueness for this product rests in its use of a plethora of futures contracts in order to obtain exposure. The index invests in contracts that fall within the first three months of the curve in equal number of contracts. This results in exposure across multiple delivery periods and somewhere between 67 and 108 different contracts being included in the index at any one time.
This approach could reduce contango issues as well, while limiting the damage—or benefit—from a single futures contract. The technique is also probably unsuitable for an ETF, thanks to all the contract buying and selling, making the ETN structure ideal for this strategy (see Inside the Managed Futures ETF).
This note is also a bit cheaper than its counterpart, coming in with an annual fee of 65 basis points a year. However, this will likely suffer from low volume and a wide spread, at least initially, so costs could be higher here as well.
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