Intelligent Index Design Delivers in Q4
January 13, 2023
Read Time 4 MIN
Natural Gas Contributes From Rebalance
December 2022
December was a mixed month for commodity index strategies overall. The UBS Constant Maturity Commodity Index (CMCI) had a good month relative to the industry’s primary benchmark, the Bloomberg Commodity Index (BCOM); 0.3% and -2.4%, respectively. BCOM outperformed for most of the year due to its overweight in natural gas. However, CMCI’s index design paid off at the end of the year. CMCI has a smaller natural gas position by design, but most importantly, the index rebalances monthly back to its target weightings.
Year-to-Date 2022
Natural gas was the strongest commodity for most index strategies. Not surprisingly, BCOM’s weighting grew during the year to over 13%, which was its largest individual commodity exposure by far. Due to some very unseasonably warm weather forecasts for the U.S. northeast, U.S. natural gas prices fell sharply in December. BCOM’s natural gas exposure declined by 33%, costing the index 4.5% for the month.
Since CMCI rebalances back to its 3.5% target weighting every month, the index’s natural gas position showed losses in December of 24% on the smaller exposure. This cost the index less than 1%. We like to highlight CMCI’s rebalancing feature which has been effective in combatting extreme price movements in individual commodities, which very often means reverting. By rebalancing monthly, CMCI lowers overall volatility and often takes profits on extreme price movements.
Commodity Sector Target Component Weights
Source: Bloomberg. CMCI’s Target Weights as of July 2022; BCOM’s Target Weights as of November 2022.
Index & Sector Review: Energy Led YTD while Precious Metals Rebounded in December
December 2022
The precious metals sector was the strongest performing sector in December, rising over 5%. This was led by a very strong rally in silver, up 10%. The decline in the U.S. dollar also supported the precious metals rally.
The agriculture, industrial metals and livestock sectors were all modestly higher in December.
Year-to-Date 2022
The energy sector led all sectors, continuing the trend from 2021. The strongest gains for the energy sector came from gasoil and heating oil. Both gained roughly 40% and almost 70%, including roll yield for the year. This is a supply problem that could persist and might keep heating oil and gasoil prices high and rising for a few years.
The agriculture sector gained approximately 17% for the year. The Russia-Ukraine war disrupted global agricultural trades in the production of corn, wheat, and fertilizer.
The livestock sector gained about 9% for the year. Lean hogs were up 18%, but CMCI’s monthly rebalancing improved returns. The livestock sector has a small weighting in the index so the overall contribution to the index returns was modest.
The precious metals sector was close to unchanged for the year but also had a volatile roller coaster ride. Gold prices rose early in the year from $1,800 to over $2,000 due to fears of Russia’s invasion of Ukraine. Prices peaked shortly after the invasion and declined until early November; bottoming just above $1,600. The U.S. dollar peaked in early September and started to decline in early November, allowing gold to recover losses into year-end, completing the roller coaster ride to finish unchanged at $1,800.
The worst-performing sector for 2022 was the industrial metals sector. This is an important sector for CMCI due to having the highest relative exposure to the sector when compared to other major commodity index products available in the market. Copper, the largest individual commodity exposure in the metals sector, declined by over 10% for the year. This was offset by a very big rally in nickel prices which rose almost 50% in 2022.
Looking Ahead - 2023
Curve positioning, roll methodology and monthly rebalancing all help CMCI outperform BCOM over the long term. In the short term, it can hurt relative performance, as evident in several months in 2022. We anticipate 2023 to be a good year for commodity index products. China’s reopening of its economy from the Zero-COVID policies is expected to cause a burst of economic growth in the Spring. Additionally, the U.S. Federal Reserve’s aggressive tightening is likely to end in the first half of the year. And finally, as the Russia-Ukraine war prolongs, supply constraints are likely to remain consistent, resulting in positive roll yields.
Roll Yield Estimates YTD - December 2022
Source: Bloomberg. Data as of December 31, 2022.
Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.
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Disclosures
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a Total Return rules-based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. The Fund is subject to the risks associated with its investments in credit, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, counterparty, debt securities, derivatives, index tracking and data, industry concentration, money market funds, management, market, operational, regulatory, repurchase and reverse repurchase agreements, subsidiary risks and U.S. government securities. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2023 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Securities Corporation.
Related Funds
Disclosures
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a Total Return rules-based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. The Fund is subject to the risks associated with its investments in credit, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, counterparty, debt securities, derivatives, index tracking and data, industry concentration, money market funds, management, market, operational, regulatory, repurchase and reverse repurchase agreements, subsidiary risks and U.S. government securities. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2023 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Securities Corporation.