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 older products in the space is the Goldman Sachs GS Connect S&P GSCI Enhanced Commodity ETN (GSC), which has accumulated close to $70 million in assets under management since launching in mid-2007 [also see How To Lose Money Investing In Commodities].
Here’s a quick overview of the basics of GSC:
- Issuer: Goldman Sachs
- Index: S&P GSCI Enhanced Commodity Total Return Index
- Number of Commodities: 24
- Largest Allocation: Crude Oil (34.7%)
- Inception Date: July 31, 2007
- Expense Ratio: 1.25%
- Assets: $68 million (as of 12/20/2011)
- Structure: Exchange-Traded Note
Under The Hood
GSC seeks to replicate the S&P GSCI Enhanced Commodity 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 11/30/2011) :
GSC makes allocations across all of the major commodity families, including exposure to energy, precious metals, agriculture, industrial metals, and livestock. However, investors should note that GSC’s underlying portfolio is far from balanced; this ETN is heavily tilted towards energy commodities, which account for over two thirds of total assets [see Crude Oil Guide: Brent Vs. WTI, What's The Difference?].
GSC distinguishes itself from its close relatives, GSP and GSG, by undertaking a unique approach to mitigate the adverse impacts of contango. In the oil markets, for WTI crude futures, if the contango between the first and second months is more than 0.50%, the index rolls from the 1st to the 6th month, rather than the 1st to the 2nd. For Brent crude futures, if the contango between the 2nd and 3rd months is more than 0.50%, the index rolls from the 2nd to the 7th month. GSC’s modified index also takes into account seasonal factors for the other commodity holdings; heating oil is only rolled to the December contract (annually), and natural gas only to the January one. This unique rolling methodology is also applied to the agricultural commodities; Chicago wheat contracts are rolled only to September or December (biannually), corn is rolled only to the July contract (annually), lean hogs are rolled to April or August (biannually), and live cattle contracts are rolled only to April or October (biannually).
Although GSC bears the inherent credit risk that is associated with all ETNs, we feel that this is the preferred product structure for accessing the commodity space. Futures-based ETFs, such as the popular DBC, require investors to fill out a K-1 tax form at the end of every year. With ETNs on the other hand, there is no annual mark-to-market that spurs a taxable event, and shareholders of GSC have to record a loss or gain only upon sale. This advantageous feature gives investors more control over their tax liabilities, and can be a huge benefit for those seeking long-term commodity exposure [see The Five Most Active Commodities Of 2011].
How To Use
GSC could appeal as a tactical tool for investors with a bullish outlook on energy prices who are seeking relative balance in their exposure, but still want to maintain a relatively high allocation in this lucrative corner of the commodity market [see 12 High-Yielding Commodities For 2012]. This ETN also employs an interesting methodology that is intended to reduce the adverse impacts of contango, although it hefty 1.25% expense fee is hard to justify without the necessary historical performance to prove the advantages of its unique roll structure. Long-term investors looking for a broad, well-rounded commodity products are better off with a cheaper and more diversified alternative like DJCI.
Disclosure: No positions at time of writing.