Jefferies, the publisher of the popular Reuters-Jefferies CRB Index, recently launched the Jefferies | TR/J CRB Global Commodity Equity Index Fund (CRBQ) which invests in the stocks of companies primarily involved in the production and distribution of commodities and related products and services.
This new ETF will seek to track the performance of the Thomson Reuters/Jefferies In-The-Ground CRB Global Commodity Equity Index, which is essentially intended to be an equity version of the benchmark CRB Index. The fund’s 147 holdings are comprised of agriculture (38%), industrial metals (14%), precious metals (9%), and energy (39%) and its top three holdings are Monsanto, Exxon, and Potash.
This is an interesting new entrant into the commodity ETF space given the current regulatory microscope futures-based commodity ETFs are under. By investing in the equities of companies involved in the production and distribution of commodities – and not using futures contracts – operation of the fund will not be affected by potential regulations concerning position limits that futures-based commodity ETFs are currently dealing with.
In addition, the ETF avoids the complexities involved with futures-based commodity ETFs such as contango and backwardation. These conditions reflect higher or lower forward month prices relative to spot prices. This can either decrease or increase returns of the ETF since the fund might have to purchase forward futures contracts at a premium or discount to the spot price. In addition, investors won’t have to file a schedule K-1 with their annual tax returns, a small nuisance that investors must deal with on futures-based commodity ETFs which are structured as limited partnerships.
Finally, another potential benefit – one that is often overlooked when investing in futures-based commodity ETFs – is the ability to capture dividends. Since the fund is investing in companies, and not contracts, investors can reap the rewards of any dividends paid by those companies.
While this equity ETF does not encounter some of the issues involved with futures-based commodity ETFs , it’s important to note that the equities of commodity producers and distributors can behave differently than the commodities themselves. If the stock market is dropping precipitously, it’s highly likely that the stocks of commodity producers will drop as well, even if the actual commodities are performing differently. For example, during the most recent market collapse, DBA, which invests in agriculture-related futures contracts and swaps was down approximately 49% (from its high to low), while it’s equities-based counterpart, MOO, was down a whopping 70%. In other words, investors looking for agriculture exposure via equities suffered an additional 21% loss than had they made the more pure play.
Also, because this ETF holds global equities and thus, has holdings denominated in currencies other than the dollar, currency fluctuations can be either supportive or detrimental to the overall performance of the fund – a dynamic that doesn’t concern fully dollar-denominated futures-based commodity ETFs.
