The fund tracks the Optimised Roll Commodity Total Return Index, a broadly diversified index whose weights are based on the Bloomberg Commodity Index and incorporates a smart roll mechanism that aims to deliver curve enhanced returns.
The Bloomberg Commodity Index consists of 22 commodities with sector exposures of 35.5% in agriculture, 30.9% in energy, 17% in industrial metals, and 15.6% in precious metals.
Roll yield
Commodity futures contracts trade either in contango, where forward month futures contracts trade at a premium to the current month and hence there is a cost (negative roll yield), or in backwardation, where forward month futures contracts trade at a discount to the current month (positive roll yield).
Since it is not practical to physically invest in a range of commodities, the fund gets its commodities exposure through an unfunded total return swap that tracks the underlying futures contracts representing the 22 components of the Bloomberg Commodity Index.
The fund invests in and physically holds US T-bills and any swap exposure is over-collateralised and reset on a monthly basis.
Incorporate exposure
Viktor Nossek, director of research at WisdomTree Europe said: “Investors are keen to incorporate broad commodity exposures in their portfolios due to the fact that it has low to negative correlations to other asset classes and therefore enhances portfolio diversification.
“The roll methodology in the WisdomTree Enhanced Commodity Ucits ETF substantially mitigates the costs of holding commodity futures contracts and has historically generated positive roll returns. This removes one of the main barriers to having a long term allocation to commodities, whilst the current macro environment is also supportive of increased exposure to this asset class.
“Across the various commodity sectors, fundamentals have improved; ranging from a steadier environment for the oil price, negative interest rates likely to benefit sentiment towards gold and a more positive view on emerging markets activity that may drive returns in industrial metals,” he said.
