Constant Maturity: A More Intelligent Approach to Commodities Investing
February 01, 2022
Read Time 2 MIN
Commodities act as a hedge against inflation, typically outperforming U.S. stocks and bonds during inflationary periods. Even during periods of modest inflation (defined as 2% to 6%), commodities have historically outperformed U.S. stocks.
As commodities remain an area of interest for their ability to offset inflation, many investors may not be aware that traditional means to access commodities have inherent and often times unforeseen risks.
Access Commodities Intelligently
The VanEck CM Commodity Index Fund is a passively-managed fund that tracks the UBS Bloomberg Constant Maturity Commodity Index (CMCI). CMCI’s next-generation model addresses the three main drivers of commodity returns faced by traditional commodities indices: price movement, use of collateral and roll risk. The CMCI Index eliminates roll impact through its constant maturity, takes limited risk on its collateral and intelligently determines weightings.
- Effective Management of Rebalancing and Roll
- Issue: Many traditional indices invest in only the nearest-term (i.e., front month) futures contracts and need to repurchase them monthly in order to maintain exposure. In a typical commodity market environment, the price of a newer front month contract is often more expensive than an expiring front month contract, creating a “sell low, buy high” situation which can detract from returns over the long-run (an effect known as “negative roll yield”).
- Solution: By spreading its exposure across a range of maturities and maintaining a constant maturity through a daily rolling function, CMCI seeks to effectively manage this process across all commodity market environments—including situations where investors are experiencing negative roll yield or, alternatively, a situation where the price of a newer front month contract is lower than an expiring front month contract (i.e., a “sell high, buy low” situation).
- Intelligently Designed Relative to Prominent Indices
- Issue: Traditional indices tend to determine commodity weightings based on global production and market liquidity, which often leads to outsized positioning in energy commodities such as crude oil.
- Solution: CMCI combines economic and consumption factors to determine sector weights and then selects individual commodity components based on market liquidity. This method, we believe, provides a more holistic and flexible view of commodities markets.
- Isolates Commodity Price Movement
- Issue: Achieving commodities exposure requires collateral and many active portfolio managers seek to generate additional returns by investing this portion of the portfolio—subjecting investors to unintended fixed income exposure and other risks.
- Solution: CMCI only invests its collateral in short-term U.S. treasuries, limiting added market risk.
With inflation expected to remain a persistent risk, commodities should continue to be an area of focus. CMCI’s diversification across maturities and commodity sectors (energy, precious metals, industrial metals, agriculture and livestock), may offer investors a better overall approach than traditional commodity indices.
To learn more about the fund, please visit VanEck CM Commodity Index Fund (CMCAX).
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Disclosure:
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a total return rules-based composite benchmark index diversified across commodity components from within specific sectors.
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.
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 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 commodity-linked derivatives, risks of investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, derivatives risks, counterparty risks, non-diversification risk, credit risk, concentration risk and market risk. 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 risk, liquidity risk, interest-rate risk, market risk, credit risk, valuation risk and tax risk. 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. For a description of these and other risk considerations, please refer to the Fund’s prospectuses, which should be read carefully before you invest. The Fund offers investors exposure to the broad commodity markets, currently by investing in commodity-linked swaps.
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.
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Disclosure:
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a total return rules-based composite benchmark index diversified across commodity components from within specific sectors.
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.
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 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 commodity-linked derivatives, risks of investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, derivatives risks, counterparty risks, non-diversification risk, credit risk, concentration risk and market risk. 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 risk, liquidity risk, interest-rate risk, market risk, credit risk, valuation risk and tax risk. 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. For a description of these and other risk considerations, please refer to the Fund’s prospectuses, which should be read carefully before you invest. The Fund offers investors exposure to the broad commodity markets, currently by investing in commodity-linked swaps.
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.