Don’t hog the curve

  • Investment Insights
  • 5 minute read

As political risk increased and economic data weakened during the summer, one of our responses was to increase our Alternatives position in July. This was implemented in the Close Tactical Select Passive (TSP) Fund range by:

  • Purchasing more in physical gold ETCs
  • Purchasing an ETF with broader commodity exposure to further diversify our holdings, protect from inflation and hedge out idiosyncratic risks of single commodities, as the cycles of different industrial products vary under the same prevailing conditions

The UBS CMCI Composite Commodities ETF gives us exposure to energy (oil, gasoline and natural gas), industrial metals (aluminium, copper, lead, nickel, zinc), precious metals (gold and silver) and an array of agricultural products (from cocoa to cotton and livestock) – 29 commodities in all for a fee of just 0.34% p.a.

Physical access to such commodities is not readily available to investors due to the high ‘costs of carry’ associated with storage and transportation. As you would imagine, most investors prefer to not take physical delivery of coal or live cattle. Futures are used to get around these issues, but in order to avoid taking delivery whilst maintaining positions in the futures market, expiring contracts have to be continually replaced with new ones with later maturities. Roll returns, as they are called, result from this process and can be positive or negative. They are an important component of total returns, together with price returns (what’s my hog worth today?) and cash returns (earned from cash not used for ‘margin’ requirements – effectively a percentage of a contract’s value put aside as insurance).


The complexity is that futures contracts on 29 commodities have to be rolled in this way – and the futures curve is fluid. Normally, a futures market would reflect that prices in the future are higher than today’s (in ‘contango’), but this can reverse. This is the case currently for commodities including Brent crude and gasoline (in ‘backwardation’).

One problem with using the traditional ‘front month rolling’ method for futures trading is that when an entire position expires during a fixed trading window, an investor is potentially exposed to illiquid trading and higher roll costs. Equally, the longer a futures contract, the greater the chance that its value might diverge from the spot price of the underlying asset.

The beauty of the UBS CMCI Composite UCITS ETF is that it uses the ‘constant maturity’ method instead. This places multiple contracts out across the curve at different maturities in an attempt to avoid contract decay. Small contract positions are rolled daily and periods can be as short as a day. This does not entirely mitigate the inherent ‘roll risk’ in managing complex futures trades, but it can offer outperformance over the traditional method, as the contract may trade more closely to the spot price.

Value added

We believe the UBS CMCI Composite Commodities ETF will be a worthwhile addition to the Close Tactical Select Passive Fund range. The expertise required to understand it and use it appropriately is another example of the value we add to our clients’ portfolios.


Important information
This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients.  The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.


Before you invest, make sure you feel comfortable with the level of risk you take. Investments aim to grow your money, but they might lose it too.