Fresh from winning approval for their first broad-based commodity exchange-traded fund [ETF], Barclays Global Investors [BGI] is itching to expand. The ETF industry leader has filed with the SEC for the right to launch four new commodity ETFs that offer investors access to different slices of the commodities market.
Like BGI’s broad-based commodities fund, the iShares GSCI Commodity Indexed Trust (NYSEARCA:GSG), the new funds track Goldman Sachs-branded commodity indexes, and track those indexes by investing in a new type of option called CERFs. CERFs are long-term (five-year expiration) options contracts and are a relatively unproven product on the market. There remains some question as to whether sufficient liquidity will develop to support these ETFs, although BGI believes that it will, and so far, GSG has traded quite well.
CERFs are tied to the value of the “excess return” versions of the commodity benchmarks, which means that, despite the five-year expiration dates, they are priced as if the underlying futures contracts were being rolled from month to month. The funds also capture interest income from the cash held as collateral.
The iShares GS Commodity Industrial Metals Index Trust is designed to offer investors exposure to the industrial metals market, tracking a production-weighted index of copper, aluminum, zinc, nickel and lead futures (prospectus). Currently, the index is dominated by copper and aluminum, which have a 43 percent and 33 percent weight, respectively. Many investors are itching for exposure to metals, and especially to copper, which many see as exquisitely leveraged to the rise of the global economy.
The iShares GS Commodity Livestock Indexed Trust is designed to provide exposure to the livestock components of the commodities universe. Currently, that includes just three commodities: Live Cattle at 50.5 percent of the index, Live Hogs at 45.6 percent of the index and Feeder Cattle at 14.9 percent of the index (prospectus).
Meanwhile, the two other commodities filings provide tweaks to the original broad-based Goldman Sachs Commodity Index (GSG) ETF. The iShares GS Commodity Light Energy Indexed Trust attempts to mitigate the chief criticism of the traditional GSCI – that it is too heavily weighted in energy – by reducing energy exposure from 77 percent of the index to just 39 percent. The result is a much more diversified index that could find a strong place in the commodities market (prospectus).
The iShares GS Commodity Non-Energy Indexes Trust takes things one step further and excludes energy altogether, allowing investors to track the performance of the ex-energy component of the commodities boom (prospectus).
BGI’s chief competitor in the commodity ETF market place – Deutsche Bank – has also filed with the SEC for a series of commodity sub-sector funds, including energy, agriculture and base metals funds. DBC enjoyed first-mover advantage with its broad-based commodity fund, the PowerShares DB Commodity Index Fund (NYSEARCA:DBC); it will be interesting to see who wins the race for the sector market.
Interest in commodities exposure continues to rise: CalPERS, the massive California pension system, will make its first-ever move into the commodities market by October. Accoridng to Financial News, CalPERS CIO Russell Read recently told the Los Angeles Times: We believe commodities are an important asset class that is likely to represent a core investment for our fund."
BGI First To File For Preferred
Separately, BGI also filed for a new ETF tied to the Standard and Poor's U.S. Preferred Stock Index, a broadly diversified index containing most of the preferred securities trading in the U.S. The filing was actually made before the recent preferred stock filings from PowerShares. Together, they represent an unexpected renaissance in interest in these largely forgotten class of securities.
Preferred securities operate somewhere in the gray area between stocks and bonds. They pay a specific, fixed-dividend, and in the event of liquidation, they have a seniority rank that is higher than stocks and lower than bonds. Generally speaking, they forfeit much of the upside of stocks in exchange for lower volatility. The index (with exceptions) holds all preferred securities that meet certain liquidity requirements, provided they have a market capitalization over $100 million.
Compared to the PowerShares filings, which focus on REIT preferred and financial preferred stocks, the BGI filing is much more comprehensive.
The prospectus is available here.