Click to enlargeOne month, oil prices are on a seemingly unstoppable climb. The next, oil’s out and it’s all about agriculture. Commodities are a market of many moving parts operating on their own trend lines. There’s one exchange traded note (ETN) that addresses the issue.
ELEMENTS S&P CTI ETN (NYSEARCA:LSC) uses a long/short strategy instead of the long-only exposure provided by more popular broad-base commodity ETFs. Over the last year, LSC has lost 11.1% and it’s down 10.6% year-to-date.
How does it work?
The ETN and the indicator it tracks adjusts its positions on a monthly basis, according to how the individual commodities are trending at month’s end.
The indicator goes both long and short in six areas: energy (long or flat only – never short), softs, grain, livestock, industrial metals and precious metals. Using a seven-month weighted moving average, the indicator then determines in what areas it will be long and where it will be short. Depending on the trend, a commodity can be long or short in the fund.
The indicator determines when to be long or short in an individual commodity by using a seven-month moving average, taking only the information from the end of the month. When a commodity is above the average, it’s held long. When it’s below, it’s held short.
It should be noted that the fund’s poor performance of late is mostly because of the nature of the underlying market. For starters, LSC’s exposure wasn’t able to shift in time to capture the quick and sharp increase in commodity prices. LSC’s returns should return to normal when commodity-price volatility is high but following a more uniform trend line, and volatility won’t stay high forever.
Since the fund’s June 2008 launch, LSC has only lost 15% while others dropped a great deal more. LSC provided the diversification benefits strategic commodity investors sought and did so with less volatility than the long-only alternatives. Long-short commodity funds tend to have lower volatility and higher risk-adjusted returns as compared to long-only funds in the long-term.
Additionally, it should be noted that commodities are a good way for investors to diversify a portfolio by investing in a non-correlated asset class. LSC is below its long-term trend line right now, but perhaps there will be opportunity in the future.
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Disclosure: No positions