With the rapid expansion and development of the ETP industry, investors can now choose from a vast selection of products that offer both broad-based and sector-specific commodity exposure. With the exchange-traded product structure, investors have the ability to gain access to commodities without having to encounter the difficulties and drawbacks of opening a futures account. One of the most appealing broad-based commodity products on the market is the E-TRACS UBS Bloomberg CMCI ETN (UCI), which offers exposure to a basket of 26 different commodity futures contracts of varying maturities [see also 12 High-Yielding Commodities For 2012].
UCI’s structure and unique methodologies make this ETN an attractive option for investors who wish to establish a broad-based and long-term commodities position in their portfolio.
Vital Stats
Here’s a quick overview of the basics of UCI:
- Issuer: UBS
- Index: UBS Bloomberg Constant Maturity Commodity Index Total Return
- Number of Commodities: 26
- Largest Allocation: Energy (34.17%)
- Inception Date: April 04, 2008
- Expense Ratio: 0.65%
- Assets: $136.8 million (as of 12/13/2011)
- Structure: Exchange-Traded Note
Under The Hood
UCI seeks to replicate the UBS Bloomberg Constant Maturity Commodity Index Total Return, offering exposure to 26 different commodity futures contracts. The index breakdown by commodity family is presented in the following table (as of 12/31/2010) :
| Commodity Group |
Index Weight |
| Energy | 34.17% |
| Agriculture | 29.22% |
| Industrial Metals | 27.14% |
| Precious Metals | 5.5% |
| Livestock | 3.96% |
UCI features allocations across all of the major segments of the commodity market, including exposure to energy, agriculture, industrial metals, precious metals, and livestock. UCI’s underlying portfolio is broad-based and well-rounded with relatively equal allocations to the energy, agriculture, and industrial metals sectors.
Noteworthy Features
UCI offers investors a broad-based and well-balanced commodity exposure that is considerably different from other products on the market, which tend to be dominated by energy holdings. This ETN offers a deep portfolio of 26 different commodity futures contracts with no one commodity sector significantly outweighing the other. The fund’s largest holdings include energy, agriculture, and industrial metals products as well as small allocations towards precious metals and livestock [see also Three Reasons Why Gold Is Overvalued].
A distinguishing feature of UCI is that it employs a unique maturity structure that allows the underlying holdings to be diversified across five constant maturities from three months up to three years. Allocations in terms of maturity are as follows: 3-month (52%), 6-month (22%), 1 year (15%), 2 years (6%), and 3 years (4%). Additionally, this diversification across maturities can potentially mitigate the adverse effects of contago, which is an inherent disadvantage in futures-based products.
It is worth noting UCI’s exchange-traded note structure, which exposes investors to the possible credit risk of the issuing institution. Although the ETN structure has several drawbacks, UCI 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 UCI have to record a loss or gain only upon sale [see also 25 Ways To Invest In Crude Oil].
How To Use
UCI’s advantageous tax treatments and unique maturity makes this ETN an appealing option for investors wishing to add long-term, buy-and-hold commodity exposure. Unlike most commodity ETPs that are dominated by the energy sector, UCI’s well-diversified portfolio maintains relatively balanced allocations towards energy (34%), agriculture (29%), and industrial metals sectors (27%) while also giving exposure to precious metals and livestock. This ETN could be an appealing option for investors who wish to establish a well-balanced and broad-based commodity position in portfolios with longer time horizons.
Disclosure: No positions at time of writing.
Just for added clarity, investors don’t fill in a K-1 for investments in commodity trusts/partnerships. The partnership provides the K-1 to the investor (typically mid-February) who, as they would with a 1099, enters the 4 or so different income/expense items in their individual returns.