BlackRock has launched the iShares Commodities Select Strategy ETF, the first exchange-traded fund to provide long-only, broad exposure to commodities in a ’40 Act regulated structure.
COMT provides cost-effective, simple access to a diversified mix of commodities through futures and commodity-related companies.
The fund manager uses a roll methodology designed to minimise the negative return impact of ‘contango’, which describes a term structure of the futures curve where the future price is above the expected future spot price.
Additionally because the fund is regulated under the ’40 Act investors will not receive a Schedule K-1 tax reporting form at tax time. Instead, taxable gains and distributions will be reported on Form 1099, the typical tax report used by the vast majority of mutual funds and ETFs.
Patrick Dunne, head of iShares global markets and investments at BlackRock, says: “Commodity investments have traditionally provided investors with attractive total returns and strong diversification characteristics. COMT is intended to be an all-in-one commodity solution by providing comprehensive commodity exposure in a smarter, more efficient way through both futures and equities; removing a tax barrier that may have kept investors away from commodities and utilizing a roll methodology that seeks to improve returns.”
COMT delivers direct access to commodity prices via futures contracts, including agriculture, livestock, energy, industrial metals, and precious metals. The fund manager uses a futures roll process designed to improve returns by minimising the negative impacts of contango and seeks to benefit from the opposite of contango, known as ‘backwardation’.
In addition to futures, the fund invests a portion of its assets in stocks of commodity producers to maintain diversified commodities exposure.
COMT has a simplified tax treatment compared to most commodity funds. Most commodity funds are structured as publicly-traded partnerships, and have a pass-through taxation structure. This effectively shifts the income tax liability from the fund earning the income to the shareholders who hold the fund. Unlike such commodity funds, COMT will report taxable gains and distributions on a Form 1099, the standard tax reporting form for mutual funds and ETFs.
Daniel Gamba, head of iShares Americas institutional business at BlackRock, says, “We’re always innovating to solve our clients’ problems. We created this particular product to solve a common problem we’ve heard from many of our clients that invest in commodities. They want diversified commodities exposure through an ETF, but they don't want the cumbersome K-1 tax reporting that comes with existing approaches. So we created a long-only, diversified commodities ETF without the Schedule K-1, the first ETF of its kind.”