Investing in Commodities Intelligently: Question and Answer
August 22, 2023
Read Time 5 MIN
Commodities can enhance portfolio diversification and provide access to global growth. Historically, commodities have also acted as a hedge against inflation, outperforming U.S. stocks and bonds. Even in periods of modest inflation (2-6%) commodities have historically outperformed U.S. stocks. This blog intends to answer frequently asked questions about the VanEck CM Commodity Index Fund and VanEck CMCI Commodity Strategy ETF, passively managed strategies that track the UBS Constant Maturity Commodity Index (CMCITR)1. These funds offer “pure” commodity exposure by investing in commodity-linked derivative instruments and more conservative fixed income securities, such as short-term U.S. treasuries.
- How does the UBS Constant Maturity Commodity Index (CMCITR or the “Index”) represent exposure to commodities?
- What does roll yield mean?
- What are the benefits of the index’s “constant maturity”?
- How can investors access exposure to CMCITR?
- How do the VanEck funds gain exposure to the underlying commodity positions in order to track CMCITR?
- What is the tax treatment of the VanEck funds?
- How can investors buy VanEck’s Commodity Mutual Fund and ETFs?
How does the UBS Constant Maturity Commodity Index (CMCITR or the “Index”) represent exposure to commodities?
CMCITR represents 29 commodity components across five sectors: energy, agriculture, industrial metals, precious metals and livestock. The Index is designed to reflect the economic significance and market liquidity of each commodity as opposed to a traditional global production approach, which often results in significant energy commodity exposure.
The selection and weightings of the commodity components are reviewed annually in July when new target weights are set. The Index is rebalanced monthly to target weights throughout the remainder of the year.
The Index represents futures contracts tied to each commodity component with several maturities ranging from one month to three years, effectively spreading exposure to each commodity component along the futures curve.
What does roll yield mean?
Roll yield refers to the profit or loss that can be generated when investing in the futures market due to the price difference between futures contracts with different expiration dates. For example, when traditional commodity indices roll their future contracts from month to month, instances may occur where the next month’s futures contract is purchased for more than what expiring front-month futures contracts sold for. This creates a roll loss and results in “negative” roll yield. Roll yield is positive when a futures contract trades at a higher price than future dated contracts as it approaches expiration.
What are the benefits of the index’s “constant maturity”?
With CMCITR, the maturity of each commodity component remains fixed at a predefined time interval from the current date at all times. The “constant maturity” concept is achieved by a continuous rolling process, where a weighted percentage of contracts are swapped for longer-dated contracts on a daily basis. This procedure produces a more continuous form of “pure” commodity exposure and provides a better balance of forward price behavior than traditional commodity indices, such as the Bloomberg Commodity Index (BCOM) or the S&P GSCI (GSCI). Additionally, this feature of CMCITR can minimize exposure to the negative effects of roll yield, making the index more representative of the underlying market price movements.
To avoid the “contango trap” that occurs when front-month contracts approach expiration and must be sold below the purchase price of longer-dated contracts, CMCITR’s methodology expands the range of index components beyond short-dated contracts, resulting in increased diversification across a range of contract prices and expiration dates. Rather than roll all contracts within a monthly window of just a few predictable days, CMCITR employs a daily rolling mechanism. Each day, the index rolls a small portion of its futures contracts to longer-dated maturities, based on a rules-driven formula designed to capitalize on the most attractively priced longer-term contracts. This method has the potential to reduce negative roll yield in futures contracts that are in contango and enhance positive roll yield in contracts that are in backwardation. Monthly rebalancing of contracts back to target weights helps to avoid market-driven concentrations of assets in any given contract.
How can investors access exposure to CMCITR?
VanEck offers two investments to access the returns of CMCITR. The VanEck CM Commodity Index Fund has been available to investors since 2010 and allows for daily investment at the mutual fund’s net asset value and is offered in several share classes. VanEck also recently listed an exchange-traded fund (ETF), VanEck CMCI Commodity Strategy ETF (CMCI), that allows investors to access this intelligent approach to commodity investing throughout the day on exchange. Both funds seek to track, before fees and expenses, the performance of CMCITR.
How do the VanEck funds gain exposure to the underlying commodity positions in order to track CMCITR?
Because of the complexity of the Index, such as the daily roll process, it is currently more practical for the funds to gain exposure via a total return swap agreement than to invest in the Index’s individual futures contracts. The funds engage with UBS, currently the sole swap counterparty of the funds, and enter into swap agreements in which the funds receive the return of the Index in exchange for a fee to the swap provider. This arrangement can result in slightly higher tracking error relative to the Index than may occur when investing in futures contracts directly due to the fee associate with the total return swap.
What is the tax treatment of the VanEck funds?
The VanEck CM Commodity Index Fund and VanEck CMCI Commodity Strategy ETF provide access to commodities without burdensome K-1 tax reporting. In order to provide K-1 free exposure to commodities, the funds distribute of all their net investment income to shareholders as dividends annually, and distribute any net capital gains, at least annually, in December. These distributions are generally taxable as ordinary income or capital gains, unless being invested through a tax advantaged retirement account, such as a 401K or IRA, which if distributed, may be taxed as ordinary income when withdrawn. Years in which commodities perform well may result in larger income distributions from the funds than in years with muted performance. Please consult your tax professional to determine how these distributions affect your individual tax situation.
How can investors buy VanEck’s Commodity Mutual Fund and ETFs?
1 CMCI is a total return rules-based composite benchmark index diversified across commodity components from within specific sectors.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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 or its other employees.
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.
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.
S&P GSCI is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures.
In no way does UBS sponsor or endorse, nor is it otherwise involved in the issuance and offering of the Fund, nor does it 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.
You can lose money by investing in the VanEck CM Commodity Index Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. 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. Derivatives use leverage, which may exaggerate a loss. An investment in the Fund may be subject to risks which include, but are not limited to, risks related to commodities and commodity-linked derivatives, credit, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. 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. 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.
An investment in the VanEck CMCI Commodity Strategy ETF may be subject to risks which include, among others, risks related to investing in the agricultural commodity sector, commodities and commodity-linked instruments, commodities and commodity-linked instruments tax, derivatives counterparty, energy commodity sector, metals commodity sector, U.S. treasury bills, Subsidiary investment, commodity regulatory and tax risks with respect to investments in the Subsidiary, gap, cash transactions, credit, debt securities, interest rate, derivatives, commodity index tracking, repurchase agreements, regulatory, market, operational, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and commodity index-related concentration risks, all of which may adversely affect the Fund. 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. 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. The level of derivatives counterparty risk may be heightened due to the Fund currently only having a single counterparty available with which to enter into swap contracts on the Index.
Investing involves risk, including possible loss of principal. Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
October 23, 2023
October 17, 2023
October 23, 2023
Resource companies, bolstered by structural advantages and years of efficiency-focused operations, may be uniquely positioned to fill supply gaps facing the global energy landscape.
October 17, 2023
The energy sector’s rally led to a strong quarter for commodities, and curve positioning contributed to the performance of the UBS Constant Maturity Commodity Index.
October 11, 2023
We believe the energy transition can only happen with green metals and minerals. Therefore, availability and security of supply are critical.