CMDY - BCD: High Returns Low Fees

2023-05-01 17:35:47 ET

Summary

• BCD is an index-tracking commodity ETF that has delivered competitive returns so far.
• In regard to its tracking error and expense ratio, I believe this is one of the rare cases of more than fair fees charged for the value it has delivered.
• Although this fund is a very good choice, in this article I'll explore a few better options as well.

Thesis

abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF ( BCD ) is a decent way to access exposure to commodity markets. It has offered relatively attractive returns in the past, it's been sufficient enough in tracking its index, and charges a very low expense ratio.

While I think this is a good choice, I recommend you explore a few alternatives that provide better risk profiles and returns in this article.

What does BCD do?

BCD is an index-tracking commodity ETF issued on 03/30/2017 by abrdn ETFs Advisors LLC and managed by the same and Vident Investment Advisory, LLC. Currently, its assets under management are $272.41 million.

The fund's goal is to provide returns that before fees and expenses will correspond to price changes in the Bloomberg Commodity Index 3 Month Forward Total Return. This index will consist of 24 commodities and be weighted based on trading volume, global production, and worldwide economic significance. The issuer states that the futures will be 3 months ahead of the standard contract calendar.

Additionally, there is a 30% limit on the degree of concentration the index will have in a particular sector. As of 3/31/2023, the fund has allocated 28.75% to energy, 28.39% to agriculture, 21.03% to precious metals, 16.26% to industrial metals, and 5.58% to livestock.

As the name implies, BCD doesn't have to report income using a K-1 because it invests in futures contracts on commodities indirectly through a Cayman Islands subsidiary. This also means that it can invest up to 25% of its assets in futures.

Performance

Because BCD is supposed to replicate the performance of an index, the first thing that can help us assess its performance is how closely it tracks it. As it turns out, in the last 5 years, the fund's market price increased by 8.66% per year, while the benchmark's increased by 9.05%. On a cumulative basis, the fund returned 51.51% and the price of the index increased by 54.25%.

I believe this is a narrow enough tracking error, but naturally, I would prefer to assess that using a longer time frame; of course, the fund is not that old and this is all we have. However, comparing BCD's returns to those of similar ETFs may be enough to gain a better picture in regard to its performance.

As you can see from the above chart, BCD outperformed most of its index-tracking competitors by a wide margin. It only underperformed the Direxion Auspice Broad Commodity Strategy ETF ( COM ).

Of course, total returns cannot be the only criterion for many investors. We also have to see the fund's relative volatility and market correlation to assess its performance.

Source: portfoliovisualizer.com (5/1/2018 - 5/1/2023)

As it seems, except for COM, BCD had the lowest maximum drawdown, relatively attractive volatility, as well as a low enough correlation to the market. COM, as the chart above hinted, was much less volatile and the least correlated to the market, making it a greater option when it comes to the risk profile as well.

As a "stress test" and an extra way to assess performance, let's also look at how competitive BCD is against actively managed commodity ETFs:

Evidently, BCD is superior when it comes to other prominent actively managed competitors' returns. Interestingly, it's also superior to most when it comes to the risk profile.

Source: portfoliovisualizer.com (5/1/2018 - 5/1/2023)

In the last 5 years, BCD produced the least correlated returns with the lowest volatility among most of the active ETFs above. There is one exception here made by the First Trust Alternative Absolute Return Strategy ETF ( FAAR ), which seems like the ideal pick for investors prioritizing low-volatility exposure to commodities.

At last, I would like to also compare BCD to a few commodity ETNs because they too are decent options for long-term investors. But make sure that you judge their relative performance within the context of their superior structure when it comes to a buy/hold strategy. They are debt securities that promise to deliver the differential between the purchase price and the price at maturity, eliminating any tracking error as a result. The other major difference is the generally lower volume these instruments are traded at compared to ETFs.

As you can see, BCD has outperformed most of the ETNs above in the last 5 years. Only UCIB gave better returns during this period. Because of the great margin by which this ETN outperformed BCD, I would say that it is the better choice for long-term investors who place more importance on returns than volatility and correlation.

Source: portfoliovisualizer.com (5/1/2018 - 5/1/2023)

From the table above, you can see that BCD is superior to the ETNs when it comes to the risk profile. Additionally, BCD may provide more liquidity for a diversified portfolio and it's also uncertain if the outperformance of UCIB's index will persist. It all comes down to personal conviction and needs.

Fees

Looking at the table above shows that BCD's expense ratio of 0.29% is more than fair. It has one of the lowest fees with a relatively small size of AUM. COM, with not much bigger AUM and the same track-record length, charges 0.81%. Of course, that's justified simply by its outperformance and more attractive risk profile. But because BCD's expense ratio is so much lower, I think that this is a very good price for what it has delivered so far.

Risks

• Counterparty Risk: Because the fund uses futures contracts to get exposure to commodity prices, it is subject to the risk that the other party in a futures transaction won't be able to fulfill its obligation.
• Commodity Risk: Through its indirect exposure to commodity prices, the fund is also subject to risks, such as the possibility of war, changes in regulations, and political as well as market events.
• Credit Risk: Because of its structure, the ETF allocates a large portion of its assets to fixed-income securities which carry credit risk.

Verdict

All in all, there are a few other alternatives that may provide better results in a diversified portfolio. However, BCD is still a very good choice as well and I think that a long-term investor cannot go wrong with it.

If you only have space for one commodity fund in your portfolio, I think that COM, which I covered recently, may be a better choice. And if you're mostly interested in low correlation/volatility, FAAR seems like the best bet.

This conclusion comes from the way I see things as a long-term investor looking to use commodities to diversify my portfolio. You may have a different opinion on the matter because of your own POV. Please, take a moment to tell me what your thoughts are. Also, let me know if this post helped you in any way. Thank you for reading.

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