With equity markets sputtering thanks to the fiscal cliff, investors are once again looking to commodities for exposure. Luckily there is no shortage of ways to play this market in exchange-traded form, as literally dozens of ETFs and ETNs occupy the segment.
However, many investors are probably not getting the returns they want in many of these products, as most focus in on front-month futures and continually roll from one front month contract to the next. This process usually results in a great deal of contango, a factor that can destroy returns when compared to spot price performance (see Three Biggest Mistakes of ETF Investing).
In order to mitigate this issue, many ETF and ETN firms have developed contango killing products that seek to limit the impact from this problem. While these have seen varying levels of success and interest over the past few months, a new big name in the space could finally tip the scales, Jim Rogers.
Rogers, the legendary commodity investor and China bull, has already developed a suite of ETPs that focus in on commodities, be it in equity form or in the case of futures. Some of his products have seen great interest and there are now five more targeted options in the space that could provide investors with even more options.
RICI Enhanced Methodology in Focus
These five all look to provide commodity exposure on the basis of expected economic global demand. The notes seek to invest in futures contracts with varying maturities to maximize returns when there are big differentials between near-dated and future-dated contracts.
In total, this strategy will be applied to five specific commodity groups; agricultural, broad, energy, industrial metals, and precious metals. All look to cost investors 95 basis points a year in fees while volume could be quite light for all, at least initially (see Natural Gas ETFs: Futures vs. Equities).
Investors should also note that the products are structured as ETNs, so tracking error will not be an issue, but credit risk will, although the issuing institution is RBS. This should be considered a minor worry for most investors, as it allows for an easier application of the strategy in question which can shift between many futures contracts in a short period of time.
Nevertheless, with commodity guru Rogers behind the scenes, some investors could feel quite comfortable with these contango fighting ETNs in their portfolios. This could be especially true if current market conditions hold, which is why we have briefly outlined some of the key points on each of the five new ETNs below:
RBS Rogers Enhanced Agricultural ETN - This product looks to invest in a wide variety of agricultural commodities both in the softs and grains segments. Corn accounts for over one-fifth of assets, while wheat (9.1%), soybeans (8.1%), and sugar (7.5%) make up the rest of the top four, giving the fund a grains tilt (see USAG in Focus as Agricultural Commodity ETFs Soar).
RBS Rogers Enhanced Commodity Index ETN – This RBS note looks to be roughly equally weighted towards agricultural and energy commodities—about 40% each—while industrial metals (12%) and precious metals (7.5%) account for the rest. Currently, top holdings include a nearly 20% weighting to oil (roughly equally divided between WTI Crude and Brent Crude), while natural gas and corn both make up another 9% each as well.
RBS Rogers Enhanced Industrial Metals ETN – This ETN hones in on the industrial metal market, giving exposure to six different commodities in this space. The product ends up being heavily weighted towards copper and aluminum, as these two make up about 30% each, while zinc and lead have double digit allocations as well (read Top Ranked Industrial Metal ETFs in Focus).
RBS Rogers Enhanced Precious Metals ETN – For investors seeking a new way to obtain exposure to all four of the precious metals, RGRP could be a way to go. Gold makes up just over half of the portfolio while silver (23.6%), palladium (12.4%), and platinum (11.9%) round out the rest.
RBS Rogers Enhanced Energy ETN – This note offers up exposure to some of the most vital commodities in the world with holdings in six energy products. WTI crude takes the top spot at 29% of assets, and Brent crude and natural gas each have about 22.8% of the note as well with heating oil, gasoline RBOB and gas oil rounding out the rest.
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