BlackRock has launched an exchange traded fund (ETF), which it says provides exposure to a variety of commodity markets for investors seeking portfolio diversification tools.
The move has been made at a time when the correlation between historically uncorrelated asset classes is rising.
The iShares diversified commodity swap Ucits ETF delivers exposure to 20 different commodities representing five sectors, including energy, agriculture, industrial metals, precious metals and livestock.
The fund seeks to replicate the performance of the Bloomberg Commodity USD Total Return Index. This index represents commodities that are deemed important and economically significant to the world economy. Each sector is capped at 33 per cent and each single commodity at 15 per cent.
The fund uses unfunded total return swaps to achieve this exposure, which BlackRock claims is more operationally practical than holding physical commodities such as precious metals or livestock. The fund has a total expense ratio of 0.19 per cent.
The company said that diversification was becoming more difficult to achieve due to increasing correlation between equities and bonds across global markets.
It added that this fund was a direct response to growing investor appetite for asset classes that offer stronger diversification impact in portfolios, and many are looking to commodities.
Earlier in July BlackRock expanded its fixed income ETF range with the launch of a floating rate bond fund. The company said the ETF was designed to protect investor portfolios against a rise in interest rates.
Provider view
Fergus Slinger, co-head of iShares sales EMEA, said: “By capping the single commodity and sector exposure in the fund, investors are not over-exposed to a particular part of the market. It can therefore serve as an alternative to purchasing individual futures or investing directly in physical commodities.”
Adviser view
Dennis Hall, chief executive at Yellowtail Financial Planner, said: “The diversified commodity swap just sounds complicated. It uses financial instruments that introduce another element into the picture, and frankly I don’t buy into the rationale. I see this as high risk.
“I am concerned that because ETFs are relatively easy to set up, managers create them to meet short-term needs rather than long-term investment propositions. I’d be surprised if this ETFs survived over the long term.
“I wouldn’t rush to utilise this in our clients’ portfolios, for one thing because it is somewhat specialist, and secondly because it is harder to model any expected long-term returns due to the nature of these assets.
“I would find it extremely difficult to explain how this ETFs worked to my clients, and that creates uncertainty. I’m sure there is a market for it, but it’s not through advisers like me.”
Charges
The fund has a total expense ratio of 0.19 per cent.
Verdict
There is concern that ETFs like this are too easy to set up to achieve a short-term aim.
