Access Commodities Intelligently: Question and Answer
July 29, 2022
Read Time 4 MIN
Commodities can enhance portfolio diversification and provide access to global growth. Historically, commodities have also acted as a hedge against inflation, outperforming U.S. stocks and bonds. Even in periods of modest inflation (2-6%) commodities have outperformed U.S. stocks. This blog intends to answer frequently asked questions about the VanEck CM Commodity Index Fund, a passively managed fund that tracks the UBS Constant Maturity Commodity Index (CMCI)1 and offers “pure” commodity exposure by investing in commodity-linked derivative instruments and more conservative fixed income securities, such as short-term U.S. treasuries.
- How does the UBS Constant Maturity Commodity Index (CMCI) gain exposure to commodities?
- What does roll yield mean?
- What are the benefits of the index’s “constant maturity”?
- What is the tax treatment of the VanEck CM Commodity Index Fund?
- How can investors buy VanEck Mutual Funds?
How does the UBS Constant Maturity Commodity Index (CMCI) gain exposure to commodities?
CMCI diversifies across 26 commodity components and up to five maturities, and can efficiently adapt to the changing economic environment. CMCI chooses between futures contracts with maturities of three, six and 12 months, as well as two- to five-year maturities for certain commodities. This can be done either selectively for individual commodities to diversify over time, or collectively for all those included in the index to diversify both across commodities and over time. CMCI is rebalanced monthly to bring components back in line with their target weights.
CMCI invests in commodity futures contracts and is diversified across five sectors: energy, agriculture, industrial metals, precious metals and livestock. The weighting process for the Index is designed to reflect the economic significance and market liquidity of each commodity.
The selection and weightings of the futures contracts are reviewed annually and new target weights are determined. The Index is rebalanced to the new target weights during the maintenance period, which is the final three CMCI business days of July.
The performance of CMCI has three components: income return (interest earned on investment collateral), spot return (gain or loss on the commodity price) and roll return (gain or loss from rolling the futures contract forward). Commodity futures contracts, unlike stocks, expire monthly, or at another predetermined point in time. This expiration point is known as the contract’s “maturity,” or time to physical delivery.
What does roll yield mean?
Roll yield refers to the profit or loss that can be generated when investing in the futures market due to the price difference between futures contracts with different expiration dates. For example, when traditional commodity indices roll their future contracts from month to month, instances may occur where the next month’s futures contract is purchased for more than what expiring front-month futures contracts sold for. This creates a roll loss and results in “negative roll yield.” Roll yield is positive when a futures contract trades at a higher price as it approaches expiration.
What are the benefits of the index’s “constant maturity”?
With CMCI, the maturity of each commodity component remains fixed at a predefined time interval from the current date at all times. The “constant maturity” concept is achieved by a continuous rolling process, where a weighted percentage of contracts are swapped for longer-dated contracts on a daily basis. This procedure produces a more continuous form of “pure” commodity exposure and provides a better balance of forward price behavior than traditional commodity indices, such as the Bloomberg Commodity Index (BCOM) or the S&P GSCI (GSCI). Additionally, this feature of CMCI can minimize exposure to the negative effects of roll yield, making the index more representative of the underlying market price movements.
To avoid the “contango trap” that occurs when front-month contracts approach expiration and must be sold below their purchase price, CMCI’s methodology expands the range of index components beyond short-dated contracts, resulting in increased diversification across a range of contract prices and expiration dates. Rather than roll all contracts within a monthly window of just a few predictable days, CMCI employs a daily rolling mechanism. Each day, the index rolls a small portion of its futures contracts to longer maturities, based on a rules-driven formula designed to capitalize on the most attractively priced longer-term contracts. This method has the potential to reduce negative roll yield in futures that are in contango and enhance positive roll yield in contracts that are in backwardation. Monthly rebalancing of contracts back to target weights helps to avoid market-driven concentrations of assets in any given contract.
What is the tax treatment of the VanEck CM Commodity Index Fund?
The VanEck CM Commodity Index Fund provides access to commodities without burdensome K-1 tax reporting. The fund makes distributions of all its net investment income to shareholders as dividends annually, and makes distributions of any net capital gains, at least annually, in December. These distributions are generally taxable as ordinary income or capital gains, unless being invested through a tax advantaged retirement account, such as a 401K or IRA, which if distributed, may be taxed as ordinary income when withdrawn. Please consult your tax professional to determine how these distributions affect your individual tax situation.
How can investors buy VanEck Mutual Funds?
1 Effective July 1, 2022, the index name changed from UBS Bloomberg Constant Maturity Commodity Index to UBS Constant Maturity Commodity Index (CMCI) and is managed by MerQube Inc. CMCI is a total return rules-based composite benchmark index diversified across commodity components from within specific sectors.
This is not an oﬀer to buy or sell, or a recommendation to buy or sell any of the securities/ﬁnancial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, ﬁnancial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reﬂect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently veriﬁed for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
S&P GSCI is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
You can lose money by investing in the VanEck CM Commodity Index Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. The Fund is subject to the risks associated with its investments in credit, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, counterparty, debt securities, derivatives, index tracking and data, industry concentration, money market funds, management, market, operational, regulatory, repurchase and reverse repurchase agreements, subsidiary risks and U.S. government securities. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
Investing involves risk, including possible loss of principal. Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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