Given the weak performance of the stock markets ahead of budget negotiations, many investors are looking for exposure in commodities.
Although there are dozens of ETFs and ETNs in this segment, most fail to deliver adequate returns as they focus on front-month futures and roll contracts continually. This strategy can backfire if markets are in Contango, a condition where future prices are higher than spots prices, i.e. there are more consumers and buyers than sellers.
To overcome this problem, many firms have developed Contango killing products in the past. While these products have met with varying levels of success, legendary commodities trader and China bull Jim Rogers appears to finally turn the tide. Rogers has launched a plethora of commodity focused exchange traded products, which are both equity as well as futures-based in nature. RBS has thrown its weight behind Rogers and has launched five products that offer exposure to commodity indexes bearing the name of the hard assets investor.
These five products provide commodity exposure depending upon global economic cycles. The notes seek to maximize returns when the differential is highest between near-term contracts and further-term future contracts.
The investment strategy will be applied to five commodities; precious metals, base metals, agricultural, energy and broad market. Since the products are structured as ETNs, tracking errors would be negligible, though credit risks remain. The key points of the five products are discussed below:
RBS Rogers Enhanced Precious Metals ETN (RGRP) – This product follows the RICI Enhanced Precious Metals Index, a composite US dollar based benchmark that tracks the value of a weighted basket of four precious metals commodities. Gold makes up 50 percent of the portfolio while Silver (25 percent), Palladium (12.5 percent) and Platinum (12.5 percent) round out the rest.
RBS Rogers Enhanced Industrial Metals ETN (RGRI) – This ETN tracks the RICI Enhanced industrial Metals Index and seeks exposure in six different industrial metals. Both Aluminum and Copper make up 30.77 percent each while Zinc (15.38 percent), Lead (11.54 percent), Nickel (7.69 percent) and Tin (3.84 percent) contributes the rest.
RBS Rogers Enhanced Energy ETN (RGRE) – This note tracks the RICI Enhanced Energy Index and provides exposure to six energy commodities with Crude Oil (31.71 percent), Brent (24.39 percent) and Natural Gas (17.07 percent) occupying the top three spots. RBOB Gasoline (9.76 percent), Heating Oil (9.76 percent) and Gas Oil (7.32 percent) round out the rest.
RBS Rogers Enhanced Agricultural ETN (RGRA) – This ETN seeks exposure in a wide variety of agricultural commodities. The RICI Enhanced Agriculture Index consists of 20 different items, containing both grains and soft commodities. Corn (18.42 percent), Sugar (8.55 percent), Wheat (7.89 percent), Soybeans (7.89 percent) and Coffee (7.89 percent) take the top spots.
RBS Rogers Enhanced Commodity Index ETN (RGRC) – This product follows the RICI Enhanced Commodity Index and is basically a weighted average of the above four indexes. The RICI Enhanced Energy Index contributes 41 percent while the RICI Enhanced Agriculture Index makes up 38 percent of the composite index. Industrial metals (13 percent) and precious metals (8 percent) account for the rest.
Whether these newcomers will really become investors’ favorites during these uncertain times remains to be seen. About 9 months of historical data is what I like first, before forming an opinion as to the feasibility and validity of these products.
Disclosure: No holdings