The exchange-traded products industry has provided investors with a new tactical tool for adding commodities exposure to their portfolios. Investors can now choose between a variety of ETPs that offer both broad-based and targeted exposure without having to encounter the difficulties and drawbacks of opening a futures account. One of the newest products on the market is the Pure Beta Broad Commodity ETN (BCM), which gives investors access to a basket of 24 different commodities [see also Why The IEA Is Backing Nuclear Power].
BCM’s structure and unique methodologies make this ETN an appealing option for investors who wish to establish a broad-based and long-term commodities position in their portfolio
Here’s a quick overview of the basics of BCM:
- Issuer: Barclays iPath
- Index: Barclays Capital Commodity Index Pure Beta TR
- Number of Commodities: 24
- Largest Allocation: Gold (21.3%)
- Inception Date: April 21, 2011
- Expense Ratio: 0.75%
- Assets: $10.3 million (as of 12/2/2011)
- Structure: Exchange-Traded Note
Under The Hood
BCM seeks to replicate the Barclays Capital Commodity Index Pure Beta TR, offering exposure to 24 different commodity futures contracts. The index breakdown by commodity family is presented in the following table (as of 11/30/2011) :
BCM features allocations across all of the major segments of the commodity market, including exposure to energy, precious metals, agriculture, industrial metals, and livestock. BCM’s underlying portfolio is broad-based and well-rounded with relatively equal allocations to the energy, precious metals, and agriculture sectors [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
BCM is one of the most unique new commodity ETPs on the market, offering investors exposure to a well-rounded portfolio of 24 different commodities. Unlike most commodity products that use a pre-determined roll schedule, BCM applies the Barclays Capital Pure Beta Series 2 Methodology, which allows the fund to roll into a number of futures contracts with varying expiration dates. This variable roll schedule may mitigate much of the negative impact of contago or backwardation on returns, making BCM an appealing option for investors looking to establish a commodity position over the long term [see also Three Commodities Dividend Lovers Must Own].
It is worth noting that BCM is structured as an exchange-traded note, meaning investors will take on exposure to the possible credit risk of the issuing institution. Although the ETN structure has several drawbacks, BCM does produce a number of advantages over comparable ETFs. Unlike funds that trade futures contracts, commodity ETNs do not require investors to fill out a K-1 form at the end of the year. This benefit implies that there is no annual mark-to-market that spurs a taxable event, and shareholders of BCM have to record a loss or gain only upon sale [see also Commodity Trading Trends: Gold Stuck In A Correlation Rut].
How To Use
BCM’s advantageous tax treatments and unique Pure Beta methodology makes this ETN an appealing option for investors wishing to add long-term, buy-and-hold commodity exposure. Unlike most commodity ETPs that are biased towards the energy sector, BCM’s well-diversified portfolio maintains relatively balanced allocations towards energy (38%), precious metals (25.16%), and agriculture sectors (20.14%) while also giving exposure to industrial metals and livestock. When considering the portfolio’s largest holding, BCM is an attractive option for investors who are bullish on gold prices. This ETN could be used as a tool for those who wish to establish a well-balanced and broad-based commodity position in portfolios with longer time horizons [see also 25 Ways To Invest In Silver].
Disclosure: No positions at time of writing.