(An earlier version of this story included an incorrect total prices for USCI and DBC. The correct prices, which make the new BNP fund the cheapest in class, appears below. We regret the errors.)
BNP Paribas, the Paris-based bank, today rolled out a futures-based commodities fund that will go head-to-head against a couple of similar strategies, none bigger than the $5.6 billion PowerShares DB Commodity Tracking Index Fund (DBC - News).
The Stream S'P Dynamic Roll Global Commodities Fund (BNPC - News), which will track the world-production-weighted S'P GSCI Dynamic Roll Excess Return Index—a long-only synthetic portfolio consisting of futures contracts on 24 underlying index commodities—will have an estimated aggregate annual fee of 0.86 percent, according to an April 23 prospectus describing the new fund.
BNPC will go against DBC, which is slightly more expensive at 0.93 percent -- including an 0.08 percent brokerage fee -- and will also face the United States Commodity Index Fund (USCI - News), which charges 1.08 percent in fees, including a 0.95 percent a year management fee.
Like its predecessors, BNPC also serves up broad exposure to commodities through a portfolio that reflects general price movements and inflation in the global economy.
The fund comes to market at a time when commodities prices have been pressured by growing concerns that a still-unfolding financial crisis in Europe and slowing domestic growth both in the U.S. and in China doesn’t bode well for demand for everything from grains to livestock to energy.
Still, DBC—which has been around since 2006 and has tallied losses of 7.7 percent year-to-date—has seen investors pour more than $350 million into the fund in that time frame, according to data compiled by IndexUniverse.
The two-year-old USCI—the costliest in the space —has shed 4.7 percent in value in the same period amid outflows of nearly $2 million. USCI had $383.8 million as June 5, according to data compiled by IndexUniverse.
Fund Design Targets Contango
BNPC is designed to maximize yield from rolling futures contracts in backwardated markets, and minimize roll loss in contagoed markets.
When a market is in contango, its front-month contract is the cheapest in the futures curve, meaning investors have to pay up to roll into another position upon expiration of the nearby contract, something that eats up returns—and quite significantly over time.
Backwardated markets are the opposite of contango, meaning the “roll yield” turns positive. Therefore, each time fund managers replace an expiring contract with a new one, they pay less than what they fetch for the old one, which adds to returns.
BNPC searches for what it calls the optimal contract months along the curve to roll into instead of simply rolling from one expiring futures contract into the next in an effort to minimize the erosive effects of contango. The fund focuses on the most liquid contracts in a given commodity.
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