Claymore Investments today launched what it calls “Canada’s first broadly diversified commodity ETF”. The ETF, ticker symbol CBR on the TSX, tracks a little-known index called the Auspice Broad Commodity Index. Just like the major commodity indices, the Auspice index holds a portfolio of futures contracts. Currently, the Auspice index equal weights 12 commodity futures in three broad categories: energy, metals and agriculture. The Management Fee of 0.80% is comparable to commodity ETFs and ETNs that trade on the US exchanges. According to the prospectus (available here), Claymore is responsible for all other costs and expenses. HST on the management fees charged by Claymore will bump up the MER to around 0.90%. The ETF hedges its US dollar exposure.

The product brochure accompanying the product release says that the index adopts a roll strategy that minimizes the negative impact of contango and maximizes the positive impact of backwardation. If you recall, many of the commodity ETFs launched with great fanfare and investor enthusiasm put in disappointing performance when traders systematically exploited the specific rollover dates of the contracts by front running the ETFs. Investors in CBR will be hoping that they will not be experiencing what Bloomberg Businessweek termed “Amber Waves of Pain”.

The Claymore Broad Commodity ETF is an interesting product because it provides access to a new asset class that was not available earlier in Canada. In theory, the low correlation of commodities with traditional asset classes provides diversification benefits. Assuming, the theory holds true for Canadian investors (I’m not entirely convinced that Canadian investors who already have plenty of exposure to commodities through resource stocks need to add even more commodities to their portfolios), it remains to be seen if the new ETF can deliver on that promise. So, just as with any new product, I’m on a wait-and-watch mode on CBR.

See also Jon Cheareau’s take on CBR.

This article has 14 comments

  1. I’m on the sidelines with CBR as well. But I’m not very optimistic. A lack or correlation with other asset classes has some positive value, but this value is minimal. Commodities must have an expected return at least close to that of stocks to make them interesting. If the gap is too large, a lack of correlation won’t compensate by enough.

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  3. True passive investors (of whom I have never met one, with the exception of CC in the last five years) need 3-4 ETFs – it is sad and laughable that new ones continue to emerge at such a torrid pace.

    I guarantee people buying these things could sum up their indexing expertise in three words…”ETFs are good”. They will have no idea about bid ask spreads, discounts to NAV, or tracking error and how these can be amplified with all these new offerings that have such low liquidity.

    If you want to be passive, religously stick with the CCs sleepy portfolio and ignore all these new offerings. Other than giving CC a topic to write about (which must be like a birthday present to anyone writing a daily blog), they offer zero value.

  4. @Michael: It depends on how much one allocates to non-correlating assets. If two asset classes have low or negative correlation but one has very low expected returns, allocating a small portion of the portfolio (say 5% to 10%) to that asset class will provide diversification benefits by lowering portfolio volatility. Also, the expected returns of the overall portfolio is likely similar to the asset classes in isolation because of the rebalancing bonus (provided, of course, that an investor is diligent about rebalancing).

    @Rob: All these new ETFs provide endless grist for the mill. But while I take a look and write about them, most passive investors can safely ignore these offerings. I work from a small list of ETFs: XIU, XSB, VTI, VEA and VWO. Someone who slices the portfolio into value and small cap might add a few more names. Adding a new ETF to the list is a pretty rare occurrence.

  5. Commodities can be extremely volatile (i.e. risky). Just a few years back, ther was a metal that went from thousands of dollars a ton to single digits in a matter of weeks. Of course, it can go the other way, too. If you are the gambling sort, go right ahead. I ain’t touching the stuff!

  6. I wonder what’s the advantage of buying this ETF (or any other) listed in TSX instead of a similar one listed in the US (disregarding the MER advantage it might or might not have, this is, supposing the MERs are the same). In either case, if there is no currency hedging, would it matter?

  7. @CC: It’s true that including a small amount of an uncorrelated asset class to a portfolio will lower overall portfolio volatility and that this gives a bump to the expected compound return of the new portfolio. However, if the new asset class has a lower expected return than the original portfolio, then this will tend to reduce the expected compound return of the new portfolio. Let g be the gap in expected return between the original portfolio and the new asset class. If g is too large then no matter how small an allocation you make to the new asset class, it drags down the expected compound return of the new portfolio, even taking into account the bump from lower volatility. All this can be quantified easily enough within CAPM. In most cases I’ve looked at, if g is more than 2% or 3%, expected compound returns drop.

  8. @Sean: Past studies show that commodities (as in commodity future contracts) have risk/return characteristics comparable to equities. However, it is not clear whether these past results will hold good in the future with so many investors piling into commodities these days:

    http://fic.wharton.upenn.edu/fic/papers/06/0607.pdf

    I think these ETFs are worth revisiting after they have at least a 5 year history.

    @Tony: I can think of two advantages of buying a TSX listed ETF. (1) US Estate taxes and (2) You don’t have to convert currency and take an initial 1.5% or so hit. On the negative side, Canadian ETFs that own US assets will pay a withholding tax whether or not these are held within a RRSP. If you own an US ETF directly, you don’t pay a withholding tax in a RRSP.

    @Michael: You do get a bigger rebalancing bonus when you add negatively correlated, highly volatile assets even if the expected returns have a wide difference. For instance, in this post Larry Swedroe points out that a balanced portfolio of S&P500 and treasuries, has higher returns and lower volatility when 5% of the portfolio was allocated to GSCI Commodity index even though the GSCI Index trailed stocks by as much as 8%.

  9. @CC: I can believe that adding 5% GSCI index would help if it replaced a portion of the treasuries. I.e., if the S&P500 / treasuries / GSCI mix went from 50/50/0 to 50/45/5, then it makes sense that returns would rise. Is this what was measured? Do you have a link to the Swedroe post you have in mind? Thanks.

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  11. @CC: Thanks for the link. For Larry’s example, replacing replacing 5% of S&P 500 with a commodity index does indeed increase the return despite the fact that the commodity index trailed the S&P 500 by 7.3% per year. This result depends on the very high volatility of commodities combined with a strong negative correlation with stocks that existed for the past 5 years. I’m leery of relying on only 5 years of data. Can we reasonably expect commodities to be so volatile and so negatively-correlated with stocks? I’m not sure.

  12. @CC: I poked around with the numbers in Swedroe’s example a little more. It turns out that the average one-year return for GSCI was higher than the average one-year return for the S&P 500 over 2005-2010. It’s just that commodities were so volatile that the GSCI compound return was 7.3% lower than the S&P 500′s compound return. So, I would have to be convinced that long-term average commodity returns will be at comparable levels to those of stocks before I would find Swedroe’s example compelling.

  13. @Michael: Yes, a 5-year history is too short. And yes, I’m not at all convinced either that as Canadian investors we need to add commodities as a separate asset class to our portfolios. It seems to me that commodities are the asset class du jour; in the limelight only because recent returns in US dollars have been so strong. I’m more than happy to give it a few years to see how it shakes out.

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