BlackRock’s iShares exchange-traded funds business has launched the iShares Dow Jones-UBS Roll Select Commodity Index Trust on the NYSE Arca.
It is the first exchange-traded product based on the Dow Jones-UBS Roll Select Commodity Index, which currently tracks 22 commodities futures contracts, including agriculture, energy and metals, and is designed to minimise the costs of closing expiring futures contracts and replacing them for new ones.
“Many investors look to commodities to diversify beyond stocks and bonds, but when investing in commodity funds that typically hold futures contracts, the buying and selling of contracts can detract from fund performance. By using an innovative index the iShares Dow Jones-UBS Roll Select Commodity Index Trust seeks to minimise the costs of changing or ‘rolling’ futures contracts, enabling the trust to ultimately provide investors efficient access to diversified commodities,” says Ravi Goutam, head of Americas product for iShares at BlackRock.
The iShares Dow Jones-UBS Roll Select Commodity Index Trust accesses commodities exposure through commodity index futures contracts. When the contracts are close to expiring, the fund replaces the contracts with new ones. This process is known as “rolling”. If the fund is rolling contracts for costlier later-dated contracts then the commodity market is in contango, which may detract from performance. If the later-dated contracts are less expensive than the contracts held by the fund, then the commodity market is in backwardation, which may add to performance.
The Dow Jones-UBS Roll Select Commodity Index, a version of the Dow Jones-UBS Commodity Index, aims to mitigate the effects of contango on performance. For each commodity, the index rolls into the futures contract that shows the most backwardation or least contango, selecting from those contracts with nine months or fewer until expiration.
The index currently represents 22 commodities futures contracts, which are weighted to account for economic significance and market liquidity. There are weighting restrictions on individual commodities and commodity groups to promote diversification. As of 31 July 2013, the largest sector weightings of the index included energy (38 per cent), agriculture (34 per cent) and metals (28 per cent).
