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UBS Launches 2nd Broad Commodities ETN

Olivier Ludwig

UBS, the Swiss-based bank known for its private-banking arm, added to its family of exchange-traded notes today with the launch of a broad commodities-focused ETN that provides blended exposure to a total of 28 commodities and that’s designed to control the deleterious effects of contango.

The ETRACS DJ-UBS Commodity Index 2-4-6 Blended Futures ETN (BLND - News) comes with an annual expense ratio of 0.70 percent, and is so named because it is an equal weighted portfolio among three Dow Jones-UBS indexes that cherry pick different parts of the futures curve.

Those three benchmarks are the Dow Jones-UBS Commodity Index 2 Month Forward, the Dow Jones-UBS Commodity Index 4 Month Forward and the Dow Jones-UBS Commodity Index 6 Month Forward, according to a fact sheet from UBS. The exposure scheme avoids front-month contract exposure schemes, which are often associated with the greatest contango.

Contango is a condition in futures markets wherein each successive contract becomes more expensive, which means that when futures-based investment exposures are rolled into new contracts as old ones expire, investment managers have to pay up for new contracts, eroding returns significantly over time.

The ETN joins a number of broad commodities ETFs that also employ “contango killing” strategies, notably the $6.3 billion PowerShares DB Commodity Tracking Fund (DBC - News) and the $420 million United States Commodity Index Fund (USCI - News).

UBS’ new ETN, “BNLD,” will also compete with its own $144 billion ETRACS CMCI Total Return ETN (UCI - News), which also employs a contango-mitigating strategy, but is designed around a different index and has a different strategy as it relates to dealing with contango.

Marketing competing ETNs relates to a demand, largely among institutional investors, for exposure to the Dow Jones-UBS index, but in a way that shields returns from contango.

Part of the allure of that Dow Jones-UBS index is the sector breakdown, which is as follows:

  • Energy, 32.63 percent
  • Livestock, 5.75 percent
  • Industrial Metals, 18.64 percent
  • Precious Metals, 12.56 percent
  • Soft Commodities, 8.33 percent
  • Grains, 22.09 percent

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