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Transcript
From Cattle to Cotton to Corn: Why Longer-Dated Strategy Commodities Should Have a Place In Your Portfolio BCD One way of describing commodities is that they’re raw materials which are processed and used to produce other goods. In your kitchen, you may have bread, cereal, and coffee. In your smartphone, you have silver and gold. In your car, you have gasoline and aluminum. These goods, along with many others, are commodities, but they look very different now than when they were in their original state. Besides being staples of everyday life, commodities are also an important investment class which can be used for portfolio diversification purposes1. To better familiarize you and your clients with these intriguing assets, below are a few helpful facts about commodities. news you can use: An ETF Securities Commentary what’s inside? One of These Things Is Much Like the Other Commodities are basic goods used in commerce that are easily interchangeable with other commodities of the same type2. A commodity’s quality may vary marginally from one producer to the next, but, ultimately, they should be almost uniform from one to other3. For example, an ounce of gold mined in China should have the same purity as an ounce of gold mined in South Africa. Arabica coffee beans grown in Brazil should be of the same quality as the same beans from Vietnam. From Coffee to Copper Commodities are grouped into two categories, hard and soft4. Hard commodities include natural resources like oil, copper, gold, aluminum, zinc, nickel, and natural gas. Select hard commodities like copper and oil can serve as barometers of economic strength by determining their total worldwide demand4. Soft commodities comprise of agricultural goods such as wheat, corn, coffee, cotton, soybean and sugar as well as livestock, like lean hogs and cattle. It’s All About Diversification Many portfolios typically comprise of just two asset classes, stocks and bonds. However, investors tend to further diversify their portfolios, allocating a portion of their holdings to non-traditional securities such as commodities. These securities are not correlated to the broad markets, and may also help enhance return and hedge against undesirable economic events.5 Of note, since 2000, there has been only a 35% correlation between commodities and the stock market6. Sweeten Your Portfolio Commodities can be an important source of portfolio diversification. Deciding on which commodities in which to invest depends on your investment strategy and other personal preferences. The list of commodities from which to pick is lengthy, and includes more traditional commodities like gold, silver, oil, cattle and natural gas, to more exotic commodities like orange juice, canola oil, and even butter futures7. The tricky part of investing directly in commodities is that when the futures contract comes due, you must take possession of the commodity itself. Since it’s unlikely you want a herd of cattle grazing in your front yard, an alternative choice is to invest in a basket of commodities via a low-cost ETF. commodities 101 What Are Commodity ETFs? ETFs are a simple and efficient way to introduce commodities into your portfolio. ETFs can also be a low-cost alternative to investing in this asset class, depending on the fund itself. The ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD), for example, has a total expense ratio of just 29 basis points, making it one of the lowest-cost products of its type in the U.S. Products like this allow you to invest in commodities without owning the commodity itself. ETFs like this typically invest in company stocks related to the commodity, or they consist of futures and derivative contracts that track the price of the underlying commodity, or indexes. Why Buy Commodities in an ETF Wrapper? If you want to invest in commodities, you have several options. One is to purchase the commodity futures individually8, which is not advisable for anyone other than highly sophisticated investors familiar with futures trading. The other is to invest in commodity-related companies, like energy, mining, or oil production8. But then you’re faced with the question, which companies should I invest in? Commodity ETFs take the guess work and frustration out of the process, since they come ready to invest with the commodities all neatly bundled, giving you instant exposure and ease of trading8. Think plug-and-play commodities investing. The ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD) offers access to the Bloomberg Commodity Indicies (BCOM), which is comprised of 22 commodity contracts weighted by liquidity and production data. This gives an advisor diversified exposure, as no single commodity may constitute more than 15% of the index, nor does any sector exceed 33%. BCD’s benchmark thus achieves greater balance, while other leading indicies in the space often deliver over 50% energy exposure. The 4-1-1 on K-1 Many commodity funds that hold futures contracts are regulated by the Commodity Futures Trading Commission as commodities pools. For tax purposes, however, they’re classified as limited partnerships by the IRS9. Why should you know this? Futures-based funds have unique and complex tax implications9. As such, these limited partnership ETFs generate Schedule K-1 forms, which can create inconvenience and annoyance for investors unfamiliar with K-1s or how to complete the paperwork9. To mitigate the K-1 issue, look for commodity ETFs that are K-1 free, like The ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD). Avoiding Institutional “Traffic” Most individuals who invest in commodities don’t want to take possession of the commodity in which they’ve invested when the delivery date comes due. After all, finding space in your basement for those 1,000 barrels of Brent crude could pose a logistical problem. Institutional investors know this and carefully monitor monthly maturity dates, enabling them to front-run individual investors, purchasing your shares before you have a chance to sell them. The result: the possibility of diminished returns and an unpleasant investment experience. One solution, we believe, is to invest in a commodity fund with a longer-dated strategy, usually 4-6 months out, like the ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD). Doing so potentially avoids the institutional traffic (who mostly focus only on standard monthly contracts), with the hope of resulting in a more positive experience and the potential of improved returns. news you can use: An ETF Securities Commentary our product ETFS Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD) TOTAL EXPENSE RATIO: 0.29% • • • • Available in a K-1 free, ’40 Act structure 61% cheaper than the average broad commodity ETF in the United States (0.75%10) Offers access to the diversified BCOM index, in an ETF format for the first time11 Longer dated 3-month schedule helps mitigate roll yield issues and provides significant liquidity Provided by ETF Securities, one of the most experienced commodity ETP managers in the world, including the largest provider of Bloomberg commodity products (over $4.34 billion USD12) For more information on ETF Securities products, please call 1-844-ETFS-BUY (844-383-7289) or visit etfsecurities.com/us. For the latest educational pieces please follow-us on LinkedIn at ‘ETF Securities US’ and Twitter @ETFSecuritiesUS. 1 Fidelity as of May 31, 2017, 2 Investopedia as of May 1, 2016, 3 Investopedia as of May 1, 2016, 4 CommodityHQ.com as of June 29, 2016, 5 CommodityHQ.com as of June 24, 2015, 6 Forbes.com as of August 22, 2016, 7 CommodityHQ.com as of August 15, 2011, 8 The Balance as of August 31, 2016, 9 ETF.com as of April 1, 2016, 10 Bloomberg as of March 2, 2017, 11 Bloomberg as of March 2, 2017 based on assets tracking the Bloomberg Commodity Index family globally, 12 Bloomberg as of March 2, 2017 DISCLOSURE: An investor should consider the investment objectives, risks, charges and expenses of the ETFs carefully before investing. To obtain a prospectus containing this and other important information, call 1-646-846-3130 or 844-ETFS-BUY (844-383-7289) or visit www.etfsecurities.com. Read the prospectus carefully before investing. Please see the current prospectus for more information regarding the risk associated with an investment in the Funds: https://www.etfsecurities.com/etfsdocs/USProspectus.aspx. Fund Risk There are risks associated with investing including possible loss of principal. Commodities generally are volatile and are not suitable for all investors. There can be no assurance that the Fund’s investment objective will be met at any time. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors. Because the Fund’s performance is linked to the performance of highly volatile commodities, investors should consider purchasing shares of the Fund only as part of an overall diversified portfolio and should be willing to assume the risks of potentially significant fluctuations in the value of the Fund. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. The Fund’s return may not match the return of the index. Through holding of futures, options and options on futures contracts, the Fund may be exposed to (i) losses from margin deposits in the case of bankruptcy of the relevant broker, and (ii) a risk that the relevant position cannot be close out when required at its fundamental value. In pursuing its investment strategy, particularly when rolling futures contracts, the Fund may engage in frequent trading of its portfolio of securities, resulting in a high portfolio turnover rate. As a “non-diversified” fund, the Fund may hold a smaller number of portfolio securities than many other funds. To the extent the Fund invests in a relatively small number of issuers, a decline in the market value of a particular security held by the Fund may affect its value more than if it invested in a larger number of issuers. The value of Shares may be more volatile than the values of shares of more diversified funds. During situations where the cost of any futures contracts for delivery on dates further in the future is higher than those for delivery closer in time, the value of the Fund holding such contracts will decrease over time unless the spot price of that contract increases by the same rate as the rate of the variation in the price of the futures contract. The rate of variation could be quite significant and last for an indeterminate period of time, reducing the value of the Fund. Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary are organized, respectively, could result in the inability of the Subsidiary to operate as intended and could negatively affect the Fund and its shareholders. To the extent the Fund is exposed directly or indirectly to leverage (through investments in commodities futures contracts) the value of that Fund may be more volatile than if no leverage were present. In order to qualify for the favorable U.S. federal income tax treatment accorded to a regulated investment company (“RIC”), the Fund must derive at least 90% of its gross income in each taxable year from certain categories of income (“qualifying income”) and must satisfy certain asset diversification requirements. Certain of the Fund’s investments will not generate income that is qualifying income. The Fund intends to hold such commodity-related investments indirectly, through the Subsidiary. The Fund believes that income from the Subsidiary will be qualifying income because it expects that the Subsidiary will make annual distributions of its earnings and profits. However, there can be no certainty in this regard, as the Fund has not soughtor received an opinion of counsel confirming that the Subsidiary’s operations and resulting distributions would produce qualifying income for the Fund. If the Fund were to fail to meet the qualifying income test or asset diversificationrequirements and fail to qualify as a RIC, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing its taxable income. Shares in the Trusts are not FDIC insured and may lose value and have no bank guarantee. Investor shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Ordinary brokerage commissions apply. The ETFs are new products with a limited operating history. K-1 Tax Form is a tac document used to report the incomes, losses and dividends of a partnership. The Schedule K-1 document is prepared for each individual partner and is included with the partner’s personal tax return. The Bloomberg Commodity Index (BCOM) consists of 22 commodities which are weighted 2/3 by trading volume and 1/3 world production with an additional criteria of global economic significance. Weight caps are also applied to limit concentration in a particular sector (33%) and cannot invest directly in an index. Diversification does not eliminate the risk of experiencing investment loss. ALPS Distributors, Inc. is the distributor for the ETFS Trust. ALPS is not affiliated with ETF Securities. EFS000250 6/1/2018 ETF Securities (U.S.) LLC t: 1-844-ETFS-BUY (844-383-7289) e: [email protected] w: www.etfsecurities.com