GreenHaven Commodity Services has launched the latest broad based commodity ETF, the GreenHaven Continuous Commodity Index (GCC). They filed for it back in October, but now it’s actually in the wild, and I consider this an overwhelmingly good thing.
The CRB index (Commodity Research Bureau) is the oldest commodity index out there. It started life as an equal-weighted, broad-based, long-only commodity index back in 1957 with 28 commodities represented in a mixture of both futures prices and spot prices. It did its yeoman’s service, going through numerous revisions until 2005 when the index was redesigned as the Reuters/Jefferies CRB Index [CBR]. That redesign was fundamental, and changed it from an equal-weighted index to one based on the implied economic worth of the commodities in the portfolio (e.g., oil is more important to our economy than orange juice).
But they were smart enough to keep the “old” index alive, renaming it the Reuters-CRB Continuous Commodity Index, or CCI. In its current flavor, it indexes the futures of 17 commodities: Crude Oil, Heating Oil, Natural Gas, Lean Hogs, Live Cattle, Corn, Soybeans, Wheat, Cotton, Coffee, Cocoa, Orange Juice, Sugar, Platinum, Silver, Gold, and Copper. This is the index the new GreenHaven ETF is based on, and it’s unique among commodities ETFs.
Besides having each commodity equally weighted (and rebalanced as necessary), the index is interesting in that it averages prices of the next two-to-six contract months to arrive at the indexed price for each commodity. This averaging does several things. First, it smoothes out volatility, because the index won’t be derailed if there’s one particular contract that goes nuts from localized contract supply and demand issues.
But it also has the effect of pushing out the average exposure well past the front month. This has been shown, at least recently, to be a very effective way to minimize the effects of contango, much like the Forward Month indexes we discussed just last week.
On top of that, the selection of the commodities themselves and the fact that they are held in equal weights makes for a very different looking index. One of the major criticisms leveled at GSCI and DBC indexes (and related ETFs) is that they are tremendously energy-heavy. By comparison, the CCI looks positively anorexic in Energy, with only 17.64% of index assets.
In fact, its highest weighting is in Softs (cotton, coffee, cocoa, OJ, and sugar) with 29.4%. The Metals sector comes in second with 23.52% (lower than the DJ-AIG’s 30.09% weighting, but higher than the other indexes). The other surprising weighting is the emphasis placed on Livestock: 11.76% of index assets are in Lean Hogs and Live Cattle. This means that a full 58.8% of the index is in agriculturally related commodities. It represents a completely different way of looking at commodities.
Successful investing is about many things, but ultimately, no matter what your objectives, you need the right tool for the right job. Many investors looking into commodities for the first time tend to have exposure to energy anyway, before they even look to the futures markets. But diversifying away from oil, distillates and natural gas can make a lot of sense, especially if you’re trying to make sense of the China game. The CCI (and GreenHaven’s new ETF, GCC) offers a way to do it.
A note about youth:
Trading on the CCI ETF started on January 24th, 2008. It’s worth noting that while running an ETF isn’t exactly like running NASA, GreenHaven is an extremely new company, founded just over a year ago with the apparent express purpose of launching this ETF. The company’s website doesn’t even mention the ETF or its management, or provide a prospectus, although it should theoretically be available from AMEX on request (it isn’t currently). A genuinely prudent investor would dig through the SEC filings to get the most recently filed prospectus, but it seems like they’re making us work awfully hard.
Once you get into it, the prospectus is also a bit curious. While the management fee is listed as an already-pricy 85 basis points, the expected expense ratio is 1.95%, in part because they aren’t absorbing or capping operating expenses, estimated at 70 basis points on top of their management fees. This is in sharp contrast to iShares for instance, where the GSCI Commodity ETF (GSG) explicitly absorbs all this stuff under the fund’s 75 basis point fee, as does the PowerShares’ Deutsche Bank based commodities ETF (DBC).
Also of note is that the GCC’s estimate for brokerage commissions and fees is 0.40 %. The iShares GSG’s is 0.00048%; the PowerShares’ DBC is 0.08%.
I mention none of this to be alarmist, but to point out the differences of investing with a company that manages billions and billions of dollars (Barclays) vs. a relative newcomer. At the end of the day, these funds are regulated, and investors won’t pay for expenses not actually incurred by the funds, and I suspect GreenHaven has guessed rather high in the interest of avoiding surprises.
But at the end of the day, the difference between 1.95% and 0.75% is nothing to sneeze at.