Commodity Equity ETFs Get Active - What about Futures?
by: Hard Assets Investor May 25, 2009
By Lara Crigger
With the recent flurry of news surrounding actively managed ETFs news, it was only a matter of time before the trend eventually hit commodities.
Last week, Claymore Securities filed to launch three new actively managed commodity equity ETFs: the Claymore Delta Global Infrastructure Fund, the Claymore Delta Global Hard Assets Fund and the Claymore Delta Global Agribusiness Fund.
Claymore's new funds are all equity-based. They are not the first actively managed ETFs filed with the SEC - indeed, quite a few such funds are already trading - but they are distinguished by being truly active in the traditional (read: qualitative stock-picking) sense. While most "active ETFs" follow a quantitative strategy, the new Claymore products will have at least 80% of their constituent stocks chosen using traditional qualitative methods by the funds' subadviser, Delta Global Advisors.
For all three of the funds, Delta Global will pick companies with a minimum $400 million market cap, selecting stocks using "a top-down approach to global markets and the infrastructure-related sub-sectors, along with a bottom-up approach to individual companies."
To get a better understanding of Claymore's new equity-based funds, let's take a look one by one:
Claymore Delta Global Infrastructure Fund
If approved, Claymore's infrastructure fund would capitalize on two hot themes - infrastructure and emerging markets - by seeking out companies involved in the developing world's building boom.
According to the filing, this includes miners, basic materials suppliers, utilities, telecoms, infrastructure engineers, water infrastructure, and road, rail, port and airport builders and operators.
Claymore's new ETF will be squeezing into an already crowded field of global infrastructure funds, including the SPDR FTSE/Macquarie Global Infrastructure 100 ETF (NYSE Arca: GII), the First Trust ISE Global Engineering and Construction Index Fund (NYSE Arca: FLM), the PowerShares Emerging Markets Infrastructure Fund (NYSE Arca: PXR) and the market's 800-lb gorilla, the iShares S&P Global Infrastructure Index ETF (NYSE Arca: IGF).
So far, IGF has accumulated $248.9 million in assets as of May 18, dwarfing its competitors. It also offers a diverse range of sectors: 41% of its holdings are industrials, 37% are utilities and 20% are energy companies.
But IGF has a high concentration in U.S. companies (22.49%). If Claymore can offer a more global approach, it could give IGF a run for its money.
Claymore Delta Global Hard Assets Fund
Meanwhile, for Claymore's active Hard Assets fund, Delta Global would invest in companies that stand to benefit from fluctuations (both up and down) in hard commodities prices. According to the filing, that includes those that mine, process and sell hard commodities, like precious metals, base metals, energy and energy services.
"Hard commodities" include a full range of metals - everything from gold and silver to copper and zinc - as well as natural gas, coal and even uranium.
Again, the fund faces competition from the current players in the market, including the iShares S&P North American Natural Resources Sector Index ETF (NYSE Arca: IGE) and the Van Eck Market Vectors RVE Hard Assets Producers ETF (NYSE Arca: HAP).
With $1.3 billion in assets, IGE has already gained a solid foothold in the market. However, the fund overwhelmingly invests in companies dealing with oil, gas and consumable fuels (64.9%), making it susceptible to the recent downward movements in oil prices.
HAP, on the other hand, promises broader, "one-stop shopping" for global hard assets distributors and producers, and even includes renewable energy stocks such as water and solar. But the fund has remained relatively small, with only $22.5 million in assets as of May 19.
Claymore Delta Global Agribusiness Fund
Claymore's proposed agriculture ETF would select companies involved in growing, selling, processing or trading a range of agricultural commodities, including corn, soybeans, wheat, sugar, palm oil, cotton, oats and fruit. Interestingly, it could also invest in biofuel companies.
Its main competitor would be the Market Vectors Agribusiness ETF (NYSE Arca: MOO), which we've discussed around here quite a bit lately. At $934 million in assets, MOO is large and in charge: The fund is up 13.33% YTD as of the end of April.
The Case For Active?
Details on exactly how the funds will be actively managed are still relatively sparse, and no expense ratios have yet been listed for any of the funds - a factor that could be key to their success. The challenge, as with any active strategy, is that active management has performed terribly by most measures for equity-based funds. In 2008, more than 70% of all actively managed U.S. equity funds trailed their benchmarks. With a track record like that, why would investors want to jump in?
The hope is that these funds, presumably with lower expense ratios, will do better. "If these funds can provide alpha, the bottom line is that investors will be happy," said Tom Lydon, president of Global Trends Investment and founder of www.etftrends.com.
Savvy investors will probably wait a few years to see how they do before testing the waters.
Actively Managed Commodities
Talk of Claymore's actively managed commodity ETFs has led some to wonder when someone will launch an actively managed commodity futures fund.
After all, while actively managed equity funds tend to trail their benchmarks, active commodity futures strategies have a track record of relative success. The academic literature suggests that momentum may be persistent in the commodities space, and that actively managed products could have the opportunity to consistently outperform their benchmarks.
Options do exist for interested investors. Managed futures, for example, are administered by special money managers called commodity trading advisers, each of whom possesses their own proprietary approach to futures trading. There are also always mutual funds, which have lately been on the rebound: Last week, inflows into commodities-based mutual funds hit their largest amount in almost two months, lifting total assets under management to $31.7 billion.
An ETF wrapper - with its increased tax efficiency and low expense - would possibly be even more attractive.
"Many [but not all] commodities tend to operate on their own individual trend lines and are completely uncorrelated," says Lydon. "If investors recognize that, they might be more receptive to commodity funds that take the many moving parts and varying trends into account and adjust accordingly."
The closest you can get today is the Elements S&P CTI ETN (NYSE Arca: LSC), which follows a simple momentum-based index strategy to take long and short positions in various commodity futures. Claymore itself has filed to launch an ETF-based version of a similar fund.
But there are other indexes out there that tap more directly into hands-on active management, and those indexes suggest a strong track record of performance. The Barclays CTA Index, for example, measures the performance of nearly 500 commodity trading advisers and has delivered positive returns in all but three of the past 29 years. Its worst year was 1999, when it lost 1.19%; its correlation to the S&P 500 is literally zero. You have to think investors would be interested in a fund that delivered similar results.
Of course, you would have to replicate its performance synthetically, as you could not get daily liquidity into 500 different CTAs. But surely someone can figure out how to do it ...
