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 more than 130 commodity ETPs to choose from, with some allowing for targeted exposure to a specific resource, while many instruments offer broad-based access. One of the newest commodity-basket ETNs on the market is the iPath Pure Beta S&P GSCI-Weighted ETN (SBV), which has accumulated a little over $5 million since its launch in mid-2011 [also see 12 High-Yielding Commodities For 2012].
SBV is similar to other broad commodity ETPs in many ways, however, its product structure, portfolio composition, and one-of-a-kind weighting methodology results in a unique risk/return profile that may attract some investors, while potentially turning away others.
Here’s a quick overview of the basics of SBV:
- Issuer: Barclays iPath
- Index: Barclays Capital Pure Beta Series-2 TR Index
- Number of Commodities: 10
- Largest Allocation: Crude Oil (34.7%)
- Inception Date: April 20, 2011
- Expense Ratio: 0.75%
- Assets: $5.3 million (as of 1/10/2012)
- Structure: Exchange-Traded Note
Under The Hood
SBV seeks to replicate the Barclays Capital Pure Beta Series-2 TR 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) :
SBV features allocations across all of the major segments of the commodity market, including exposure to energy, precious metals, agriculture, industrial metals, as well as livestock. However, SBV’s underlying portfolio may likely turn away investors seeking well-rounded, balanced exposure; 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?].
SBV is similar to other broad-based products in many ways when it comes to portfolio holdings, however, it features a unique weighting methodology that sets it apart from the pack. Unlike many commodity ETPs which roll their exposure to the corresponding futures contract on a monthly basis in accordance with a pre-determined roll schedule, SBV maintains the flexibility to undertake a slightly different approach. This ETN may roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Capital Pure Beta Series 2 Methodology. The unique roll process employed allows for SBV to mitigate the potentially adverse impacts of contango and backwardation [see Understanding Contango].
Investors should also be aware of the inherent credit risk associated with SBV given its exchange-traded note product structure. Although ETNs are senior debt instruments, the product structure still boasts several advantages over comparable ETFs; unlike funds that trade futures contracts such as the ultra-popular DBC, commodity ETNs will not require investors to fill out a K-1 at the end of the year. That means that there is no annual mark-to-market that spurs a taxable event, and shareholders of SBV have to record a gain or loss only upon sale, unlike shareholders of DBC who have to do so annually [see Commodity ETP: Spotlight: DBC In Focus].
How To Use
SBV is an intriguing product that may provide some investors with a host of benefits in certain circumstances; first and foremost, given the advantageous tax treatment associated with the ETN product structure, SBV may appeal to investors looking to add commodity exposure to their long-term, buy-and-hold portfolios. Also, this ETN employs a unique weighting methodology in an effort to avoid contango and backwardation. Nonetheless, SBV’s underlying portfolio is far from balanced given its significant bias towards the energy sector; this ETN could serve as a tactical tool for investors who are bullish on the energy sector, but don’t necessarily want to go “all in” so to speak [see also Three Reasons Why Gold Is Overvalued].
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Disclosure: No positions at time of writing.