Commodity ETF Spotlight: GCC In Focus

With the rapid development of the exchange-traded product industry, many investors now have the ability to add broad-based commodity exposure to their portfolios. ETPs are proving to be the most efficient means for achieving such exposure by offering low expense ratios, diversification, and more trading flexibility. One ETF offering broad exposure to commodities is GreenHaven’s Continuous Commodity Index Fund ETF (GCC), which utilizes a unique methodology of equal weighting and an addition of a Treasury Bill component.

GCC distinguishes itself from other traditional broad-based ETPS  in that its equally-weighted structure results in a unique risk/return profile. It offers a significant amount of exposure to livestock and agriculture whereas most broad commodity ETPs have their largest allocations invested in energy.

Vital Stats

Here’s a quick overview of the basics of GCC:

  • Issuer: GreenHaven
  • Index: Continuous Commodity Index-Total Return
  • Number of Commodities: 17
  • Largest Allocation: Agriculture (58.8%)
  • Inception Date: January 24, 2008
  • Expense Ratio: 0.85%
  • Assets: $623 million (as of 11/9/2011)
  • Structure: Commodity Pool / Partnership

Under The Hood

GCC seeks to replicate the Continuous Commodity Index-Total Return, a benchmark that consists of 17 different equally-weighted commodity futures contracts plus an additional Treasury Bill yield. The index breakdown by commodity family is presented in the following table (as of 11/9/2011) :

Commodity Group
Index Weight
Agriculture 47.04%
Metals 23.52%
Energy 17.64%
Livestock 11.76%

GCC is diversified across all of the major segments of the commodity market, including exposure to agriculture, livestock, energy, precious metals, and industrial metals. Despite its equall weighting, GCC’s underlying portfolio is heavily tilted towards livestock and agriculture commodities, which account for over half of total assets.

Noteworthy Features

GCC distinguishes itself from other commodity ETPs in that it uses equal weighting in its portfolio, resulting in a well-balanced and diversified structure. The equal weighting method does, however, skew the fund’s holdings towards the commonly overlooked agriculture and livestock commodities. As compared to most broad-based commodity ETPs, GCC is not as heavily invested in the volatile energy sector, which gives this fund a unique risk/return profile.

Because GCC is structured as a commodity pool and partnership, it is important to note the specific nuances of this type of structure and the significant tax liabilities that an investor can incur. Partnerships invested in commodity futures are required to mark to market on an annual basis, which results in taxes on capital gains regardless if the positions have been realized or not. Another nuance of GCC’s structure requires investors to complete a Form K-1 at the end of each year. To avoid these tax liabilities, many investors choose to achieve commodity exposure through ETNs, which in turn makes them susceptible to credit risk exposure. Although GCC is not exposed to any credit risk, it is subject to tracking error since it is a futures-based product, which could potentially have a significant impact on bottom-line returns in the long run [see also Thee Things Wall Street Journal Didn't Tell You About Commodities].

How To Use

Although GCC has its drawbacks and nuances, its use is best intended for those who truly want to add a  well-balanced and diversified commodities exposure to their portfolios. With the fund’s unique equally-weighted structure, GCC offers investors the ability to gain access to the frequently overlooked agriculture and livestock sectors. Since the fund is not as heavily invested in energy as most broad-based commodity ETPs are, GCC has minimal exposure to the volatile price movements that are inherent in energy commodities [see Crude Oil Guide: Brent Vs. WTI, What's The Difference?].

Disclosure: No positions at time of writing.

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