By Stoyan Bojinov
Exchange-traded products have become the preferred instrument for many investors looking to add core, as well as tactical, commodities exposure to their portfolios. The toolbox continues to expand, as investors have multiple options available to them, with some funds focusing in on a specific commodity, while others offer broad-based exposure. One of the oldest commodity-basket ETPs on the market is the iPath S&P GSCI Total Return Index ETN (GSP), which has accumulated a little over $100 million since its launch in mid-2006.
GSP is similar to other broad commodity ETPs in many ways; however, its product structure and portfolio composition results in a unique risk/return profile that may attract some investors, while potentially turning away others.
- Issuer: Barclays iPath
- Index: S&P GSCI Total Return Index
- Number of Commodities: 24
- Largest Allocation: Crude Oil (32.7%)
- Inception Date: June 6, 2006
- Expense Ratio: 0.75%
- Assets: $100 million (as of 11/29/2011)
- Structure: Exchange-Traded Note
Under The Hood
GSP seeks to replicate the S&P GSCI Total Return Index, offering exposure to 10 different commodity futures contracts. The index breakdown by commodity family is presented in the following table (as of 10/31/2011) :
|Commodity Group ||Index Weight |
GSP features allocations across all of the major segments of the commodity market, including exposure to energy, precious metals, agriculture, industrial metals, and livestock. However, GSP’s underlying portfolio is far from balanced; this ETN is heavily tilted towards energy commodities, which account for over two thirds of total assets.
Besides the hefty allocations to energy commodities, there are a few other aspects of GSG that are noteworthy. For starters, GSP is linked to the same index as GSG; however, its ETN product structure potentially makes it more appealing than its counterpart. While GSP is subject to the credit risk of the issuing institution since it is a senior debt instrument, its product structure still boasts several advantages over comparable ETFs.
Unlike funds that trade futures contracts such as GSG and the ultra-popular DBC, commodity ETNs will not require investors to fill out a K-1 at the end of the year. That means that there is no annual mark-to-market that spurs a taxable event, and shareholders of GSP have to record a loss or gain only upon sale, unlike shareholders of GSG and DBC who have to do so annually.
This advantageous feature gives investors more control over their tax liabilities, making the ETN product structure optimal for investors looking to add commodity exposure to their long-term, buy-and-hold portfolios. Investors should note that GSP is subject to contango, seeing as how there is no clear cut methodology outlined for the maturity dates used, unlike the one-of-a-kind USCI.
How To Use
GSP is an intriguing product that bears favorable tax treatment and may be appropriate for some investors in certain circumstances, although this ETN has a host of drawbacks that make it less than ideal as a well-diversified, core holding for long-term portfolios. When considering its underling portfolio, GSP may very well appeal to investors who are bullish on the energy sector.
This ETN could be used as a tactical tool for investors who are bullish on energy prices but don’t necessarily want to go “all in,” so to speak.In this case the minimal exposure to agricultural and industrial metals can serve as a nice cushion to smooth out the inherent volatility prominent across the energy commodities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.