Commodity ETFs Investment with use value

As tangible real assets, commodities are an independent asset class. They allow diversification and offer a potential hedge against inflation. UBS ETFs on commodities offer liquid, cost-effective access to global commodity markets.

How do ETF commodities work?

Trading like shares, commodity ETFs are a popular option for investors wishing to gain exposure to a wide spectrum of commodities on the global commodity market. This can include investment in commodity producers. Buying and selling on the stock exchange, ETF commodities are likely to have regular and transparent pricing. An exchange traded commodity can be traded on the stock exchange throughout the day every trading day.

A class of its own

Commodities are a standalone asset class that can enhance the value of your securities portfolio, because, as a rule, they – and precious metals in particular – generally exhibit only a moderate correlation with other asset classes such as equities, bonds and currencies, the performance of which has little impact on commodity prices for that reason. That means commodities can add welcome diversification benefits to a broad-based portfolio while contributing positively to the performance of the overall portfolio.

Real assets with added value

Commodities are generally seen as a good hedge against inflation – a key reason for investing in this asset class. As real assets, commodities tend to increase in value in an environment of rising consumer prices.

If the global economy is booming, demand for commodities such as crude oil, natural gas and industrial metals is particularly strong. Moreover, the prosperity of the world's population likewise tends to increase in a positive economic growth environment, which results in demands that are increasingly sophisticated and needs that are better satisfied.

Long-term prospects of ETF commodities

An investment in ETF commodities can be seen as strategic. Commodities are a viable long-term investment as resources are naturally limited and thus finite. In a market economy, a limited – and arguably steadily declining – supply leads to rising prices even if demand remains flat. In view of the growing global population, we can even expect to see increased demand for commodities over the long term in an effort to secure future supplies. One example of the potential impact is China, whose growing economy has spawned a voracious appetite for commodities to fuel its growth.

A very convenient and effective way to invest in commodities is through products that track a commodities index, for example in the form of UBS ETFs (exchange traded funds).

Using futures to participate in commodity prices

Similarly to other commodity indices, the UBS Bloomberg CMCI Index family uses futures contracts (forward commodities transactions) to track the performance of commodity prices. Trading via the futures market postpones the date of exercise of the contract (to a point in the future), typically allowing commodity traders sufficient time to avoid physical delivery (and receipt). The only requirement is that they "close out" their position before the futures contract expires. Positions may be closed out, for example through the resale of contracts. This makes it possible to participate in the price performance of the underlying commodity up to maturity without actually physically handling it.

The roll mechanism of commodity futures

It follows that, for a long-term commodity investment using futures contracts, existing contracts must be replaced by new ones before the delivery date in order to avoid physical delivery. This replacement process is referred to as "rolling", making it possible to invest in commodities without maturity constraints. However, irrespective of the current performance in the commodity market, the replacement of futures affects the value of an investment as contracts with different maturities do not as a rule cost the same. The difference between the selling price of an expiring futures contract and the purchase price of a longer dated futures contract has an influence on the performance of a commodity index. This process is referred to as the roll effect. It can result in either gains or losses.

Roll returns and losses

If the price of futures contracts with later delivery dates is lower than the current contract, rolling into the contract that is next according to maturity is cheaper. Accordingly, the number of futures contracts increases following the roll process. This is known as a roll gain or backwardation. If the price of later dated futures is higher than the current contract, rolling into the contract that is next according to maturity is more expensive. In this case, the number of futures declines following the roll process. This is known as a roll loss or contango.

The UBS Bloomberg CMCI approach

The UBS Bloomberg CMCI Index family was developed by UBS in cooperation with Bloomberg in order to track as closely as possible the real performance of commodity prices via futures contracts. As the first-ever commodity index, the UBS Bloomberg CMCI Index family uses up to five constant maturities. One the one hand, this allows the index to reflect the entire pricing picture and thus all market price assessments; on the other, roll losses are reduced as a result. The daily rolling of futures contracts ensures that the average time-to-maturity of futures contracts tracked by the UBS Bloomberg CMCI Index is kept permanently constant – unlike most traditional index concepts where one rolling transaction is conducted only once a month.

The Composite is the most broadly diversified UBS Bloomberg CMCI index and covers the entire commodity market. The UBS Bloomberg CMCI Composite TR Index includes commodities from five sectors:

  • Energy,
  • Industrial metals,
  • Precious metals, 
  • Agriculture and livestock.

Accordingly, the UBS Bloomberg CMCI Composite TR Index positions itself as a market-wide commodity index offering investors "double" diversification. This is because the index covers a wide variety of commodities while including all liquid contract maturities.

What is the UBS Bloomberg Constant Maturity Commodity Index?

The UBS Bloomberg Constant Maturity Commodity Index not only invests in short-term futures contracts but also diversifies its investments across the entire maturity curve.

By giving investors access to "constant maturities," it offers more constant exposure to the asset class while avoiding speculation that can accompany the monthly "rolling" of traditional indices; at the same time, it is able to minimize the risk of negative roll returns.

Energy plays a key role in the global economy. Crude oil and the fuels produced from it, such as heating oil and gasoline, are primarily responsible for keeping the economy running. Rising oil prices can choke the global economic engine.

Industrialized countries were first confronted with this dependence during the oil crises in the 1970s when the Organization of Petroleum Exporting Countries (OPEC) reduced production, causing the price of oil to soar. The governments of industrialized countries have since been making efforts to reduce their dependence on energy imports. Even forty years after the first oil crisis, however, fossil fuels continue to be a fundamental driver of the global economy.

What’s the UBS Bloomberg CMCI WTI Crude Oil TR Index?

The UBS Bloomberg CMCI WTI Crude Oil TR Index not only invests in short-term futures contracts but also diversifies its investments across the entire maturity curve. By giving investors access to "constant maturities," it offers more constant exposure to the asset class while avoiding transactions that can accompany the monthly "rolling" of traditional indices; at the same time, it attempts to minimize the risk of negative roll returns.

Your benefits of investing in UBS ETF commodities at a glance

  • Full replication of the commodity markets through investments across the entire futures curve
  • Minimal Tracking Error in replicating the underlying commodity indices
  • Minimized roll losses with the opportunity to earn a higher total return compared to traditional index concepts
  • Diversification across the entire futures curve results in lower volatility versus traditional index concepts
  • Higher risk/reward ratio (Sharpe ratio): Potential returns are higher and risk taken (volatility) is lower compared to traditional index concepts
  • Daily rolling allows for "constant" maturities

Commodity ETFs in focus

Fundname ISIN Replication Fee Last NAV
Currency
Fact sheet

UBS ETF (IE) CMCI Composite SF UCITS ETF (hedged to EUR) A-accIE00B58HMN42

Synthetic

0.37%

53.2599 EUR

pdf

Fund description

The investment objective of the fund is to deliver the performance of the UBS Bloomberg CMCI Composite Total Return. The stock exchange price may differ from the net asset value.The fund synthetically replicates the index performance by investing in a swap.We target to over-collateralise the funds exposure to the swap counterparty by 105%.

UBS ETF (IE) CMCI Composite SF UCITS ETF (hedged to GBP) A-accIE00B50XJX92

Synthetic

0.37%

85.0256 GBP

pdf

Fund description

The investment objective of the fund is to deliver the performance of the UBS Bloomberg CMCI Composite Total Return. The stock exchange price may differ from the net asset value.The fund synthetically replicates the index performance by investing in a swap.We target to over-collateralise the funds exposure to the swap counterparty by 105%.

UBS ETF (IE) CMCI Composite SF UCITS ETF (hedged to CHF) A-accIE00B58FQX63

Synthetic

0.37%

52.7315 CHF

pdf

Fund description

The investment objective of the fund is to deliver the performance of the UBS Bloomberg CMCI Composite Total Return. The stock exchange price may differ from the net asset value.The fund synthetically replicates the index performance by investing in a swap.We target to over-collateralise the funds exposure to the swap counterparty by 105%.

UBS ETF (IE) CMCI Composite SF UCITS ETF (USD) A-accIE00B53H0131

Synthetic

0.37%

59.8974 USD

pdf

Fund description

The investment objective of the fund is to deliver the performance of the UBS Bloomberg CMCI Composite Total Return. The stock exchange price may differ from the net asset value.The fund synthetically replicates the index performance by investing in a swap.We target to over-collateralise the funds exposure to the swap counterparty by 105%.

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Further ETFs on broad commodity indices

Fundname ISIN Replication Fee Last NAV
Currency
Fact sheet

UBS ETF (IE) DJ Global Select Dividend UCITS ETF (USD) A-disIE00BMP3HG27

Physical

0.30%

10.1865 USD

pdf

Fund description

The fund aims to track, before expenses, the price and income performance of the Dow Jones Global Select Dividend Index.The fund invests in equities of the respective index.

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