The rapid development of the ETF industry has democratized the world of commodity investing, allowing average investors to add exposure to a variety of different commodities through a single ticker. ETPs are proving to be the most efficient means for achieving such exposure by offering low expense ratios, diversification, and more trading flexibility. For those investors looking to capture exposure across a wide array of commodities, GreenHaven’s Continuous Commodity Index Fund (GCC) is an intriguing option, as the fund utilizes a unique methodology of equal weighting and an addition of a Treasury Bill component [for more commodity news and analysis subscribe to our free newsletter].
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.
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 (29%)
- Inception Date: January 24, 2008
- Expense Ratio: 0.85%
- Assets: $511 million (as of 10/12/2012)
- 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 10/12/2012) :
|Agriculture & Livestock||29%|
GCC is diversified across all of the major segments of the commodity market, including exposure to agriculture, softs, livestock, energy, precious metals, and industrial metals. Despite its equal weighting, GCC’s underlying portfolio is heavily tilted towards livestock and agriculture commodities, which account for over half of total assets.
GCC’s distinguishing feature is that it applies an equal weighting methodology to its portfolio, resulting in a well-balanced and diversified structure. This feature is ideal for those who want to avoid heavy allocations towards energy, which is a characteristic found in many other broad-based commodity ETPs. As a result, GCC’s portfolio offers a unique risk/return profile. The equal weighting method does, however, skew the fund’s holdings towards the commonly overlooked agriculture and livestock commodities.
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 [see also For Day Traders: The Most Liquid ETF For Every Commodity].
How To Use
Despite its drawbacks and nuances, GCC’s is an appealing option for those who truly want to add a well-balanced and diversified commodities exposure to their portfolios. By utilizing a unique equal weighting methodology, GCC offers investors the ability to gain access to the frequently overlooked agriculture and livestock sectors. Furthermore, 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 GSP In Depth: The Five Minute Guide To The S&P GSCI Total Return Index ETN].
Disclosure: No positions at time of writing.