By Roland Morris
Portfolio Manager and Strategist, Commodities
The first quarter of 2023 highlighted CMCI’s index design advantages.
Macro Outlook: Index Design Mitigated the Potential for Greater Losses
The UBS Constant Maturity Commodity Index (CMCI) was down slightly in the first quarter of 2023, declining by 1.15%. On a relative basis, CMCI had a good quarter compared to the Bloomberg Commodity Index (BCOM). BCOM declined by 5.36% in the quarter as well.
U.S. natural gas prices fell sharply due to warmer-than-normal winter weather, especially in the Northeast. Most of CMCI’s outperformance vs. BCOM came from the different exposures to natural gas. CMCI holds a target weighting of 3.5% in natural gas while BCOM holds 8.5%. Additionally, by design, CMCI is positioned further out the forward curve and rolls its exposure daily. Both of these factors benefited CMCI over BCOM. CMCI’s natural gas position lost 32.8% while BCOM’s natural gas position lost around 50.4% during the quarter. This important difference was due to curve positioning. BCOM’s front-month exposure declined sharply while CMCI’s longer duration positioning fell by less.
Another factor that benefited CMCI vs. BCOM during the quarter was curve positioning and roll methodology in WTI Crude oil and Brent Crude oil. Again, this is a result of index design. BCOM holds front-month exposures and the first three months on the forward curve shifted into contango (upward sloping) in the quarter. This resulted in roll losses for BCOM. CMCI is positioned further out the curve, remaining in backwardation (downward sloping). This generated an estimated 1.8% positive roll yield for CMCI while BCOM lost an estimated 1.9% during the quarter in the energy sector.
These factors do not always generate relative outperformance for CMCI. Various market conditions could work in BCOM’s favor; however, over the longer term, CMCI has outperformed. Overall, the first quarter of 2023 highlighted CMCI’s index design advantages.
Roll Yield Estimates YTD – March 2023
Source: Bloomberg. Data as of March 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
Sector Review: Agriculture and Precious Metals Gains Minimized Overall Index Losses
The energy sector fell by 7.7% in the quarter. This was partially due to the warmer weather as previously mentioned, as well as disappointing global demand which triggered the decline.
The livestock sector fell by 5.1% due entirely to a sharp decline in live hog prices. Live cattle prices rose slightly during the quarter and remained near historic all-time highs.
Precious metals prices rose during the quarter, led by gold, which advanced by 8.1%, while silver ended the quarter unchanged at 0.9%.
The agriculture sector gained 2.0%. Strong gains in sugar (21%) and cocoa (13%) offset modest declines in grains.
The industrial metals sector was up 1.6% led by solid gains in copper prices but nickel declined by 20% during Q1.
CMCI Outperformed BCOM in the Agriculture Sector
Performance by Sector Components
Source: Bloomberg. Data as of March 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.
Originally published by VanEck on April 12, 2023.
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Disclosures
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 or its employees.
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.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) is a Total Return rules-based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
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.
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.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
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 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.
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