Thursday may have been a lazy day in the markets prior to the holiday weekend, but it was rather busy in the world of exchange traded products. Barclays Bank PLC launched 18 new iPath branded "Pure Beta" exchange traded notes. These new ETNs focus on different commodity sectors.
Many commodity-related ETPs have a difficult time tracking the physical commodity. This is because the funds must invest in futures contracts rather than the physical commodity. Futures contracts must be sold as they approach expiration to avoid taking physical delivery. New contracts must then be purchased with longer expiration dates. These longer dated futures contracts are often more expensive than the current contract just sold. This is known as "contango."
The difference with the Pure Beta lineup is that they will have the ability to purchase futures contracts with different expiration dates using a rules based method to reduce the effect of contango.
The new funds launched Thursday are:
|Pure Beta S&P GSCI-Weighted ETN||SBV|
|Pure Beta Broad Commodity ETN||BCM|
|Pure Beta Crude Oil ETN||OLEM|
|Pure Beta Agriculture ETN||DIRT|
|Pure Beta Grains ETN||WEET|
|Pure Beta Copper ETN||CUPM|
|Pure Beta Nickel ETN||NINI|
|Pure Beta Livestock ETN||LSTK|
|Pure Beta Energy ETN||ONG|
|Pure Beta Industrial Metals ETN||HEVY|
|Pure Beta Sugar ETN||SGAR|
|Pure Beta Softs ETN||GRWN|
|Pure Beta Precious Metals ETN||BLNG|
|Pure Beta Lead ETN||LEDD|
|Pure Beta Cotton ETN||CTNN|
|Pure Beta Coffee ETN||CAFE|
|Pure Beta Cocoa ETN||CHOC|
|Pure Beta Aluminum ETN||FOIL|
All of the Pure Beta ETNs carry an expense ratio of 0.75%. Obviously because these are futures based they will have no yield.
The benefit to this line-up of ETNs is that they allow investors to target very specific areas in the commodity space while reducing the negative effects of contango. However, the products are still futures-based and will have to prove their effectiveness over time. Exchange traded notes also introduce another layer of risk. The note is essentially a "promise to pay." Although highly unlikely, if the issuer, in this case Barclays Bank PLC (NYSE:BCS), were to default investors could be wiped out. This risk is remote, but should always be considered.
There are some other ETPs that attempt to reduce the effects of contango. The United States Commodity Index Fund (NYSEARCA:USCI) constructs a diversified portfolio of commodity futures using a method that allows it to weight more heavily contracts that are backwardated (opposite of contango) or only exhibiting moderate contango. USCI charges a higher expense ratio of 0.95%.
I generally shy away from futures-based products because of their difficulty in tracking the physical commodity. The products coming to market now are getting better at reducing this negative effect. It will be interesting to follow the Pure Beta ETNs over time to see how effective they are at reducing contango.
For investors wishing to trade in and out of specific commodities fairly quickly, these very targeted products will be worth considering. As for longer term investors, we will watch closely how these products actually perform.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.