PDBC - BCI: A Good Commodity Diversified Fund

2023-11-10 10:50:41 ET

Summary

• The abrdn Bloomberg All Commodity Strategy K-1 Free ETF is a good option for gaining exposure to commodity futures without dealing with K-1 tax forms.
• The BCI ETF tracks the performance of the Bloomberg Commodity Index Total Return and holds futures contracts across various commodity sectors.
• BCI offers diversified exposure and a low expense ratio compared to its peers, making it an attractive choice for long-term investors.

I like the long-term thesis for commodities, but also recognize that should we be entering into a recession next year, the asset class likely will be challenged. Still, it is worth focusing on exchange-traded funds ("ETFs") that can play the space in an efficient way. I like the abrdn Bloomberg All Commodity Strategy K-1 Free ETF ( BCI ) as a way to gain exposure to commodity futures, without having to deal with getting the dreaded K-1 that otherwise would come from putting money to work here.

Top Down: Pros vs. Cons

Investing in commodities can offer multiple benefits from a longer-term perspective. First, as emerging economies, the largest producers of raw materials, continue to grow, investments in commodities support this growth, indirectly fueling global trade. Second, commodities, both soft and hard, can provide a valuable diversification option for investors, helping smooth out market volatility and potentially offering a hedge against inflation. Over time, commodities and commodity stocks have been seen to provide returns that differ from other stocks and bonds, enhancing portfolio diversification. Last, with the ongoing transition to clean energy, commodities stand to benefit from underinvestment, presenting potentially lucrative opportunities.

I'm optimistic on the prospects for commodities broadly, with Oil at the top of the list from a very long-term standpoint. Short-term is questionable though. One of the primary downside risks here is the high volatility inherent in commodity markets. This can lead to substantial fluctuations in the prices of commodities such as energy, metals, and soft commodities, which can result in significant investment losses. Moreover, the historical low long-term returns on commodities suggest that keeping allocations small and diversified is crucial. This means that having a large portion of one's portfolio in commodities can be particularly risky. Additionally, investing in commodities often requires a nuanced understanding of complex instruments such as futures contracts, which may not be suitable for all investors. Therefore, while commodities can offer a hedge against inflation, they should be treated as a form of insurance and not as a primary investment vehicle.

ETF Overview

The management of futures is why ETFs like BCI are compelling. BCI is an Exchange-Traded Fund that tracks the performance of the Bloomberg Commodity Index Total Return. This index is comprised of 24 futures contracts spanning across 22 different commodities. The constituents of the index are selected and weighted based on trading volumes and global production data. The ETF, issued on March 30, 2017, is managed by abrdn ETFs Advisors LLC and Vident Investment Advisory, LLC. BCI adopts a passive, representative sampling indexing strategy to achieve this objective. The ETF doesn't aim to outperform the index and does not typically take temporary defensive positions.

Key Holdings

The ETF holds futures contracts across diverse sectors, including energy, agriculture, precious metals, and industrial metals. The largest allocations within the fund are in gold, WTI crude oil (CL1:COM), and Brent crude oil futures, accounting for a substantial portion of the fund's assets.

Despite Gold futures being the largest single allocation, the majority of this fud is in the Energy and Agriculture commodity space. These weightings are indicative of the fund's broad-based exposure to various commodity sectors. I like this very much, as these are areas which most investors tend to not have direct exposure to in their portfolios more generally.

BCI charges an net expense ratio of 0.26%, which makes it an attractive choice for cost-conscious investors. This low expense ratio, in comparison to other commodity-focused ETFs, enables investors to gain exposure to a diverse range of commodities at a relatively low cost.

Risk Considerations

Investing in BCI involves several risks. These include:

• Commodity Risk: The ETF's performance is linked to the performance of highly volatile commodities. The prices of these commodities can fluctuate widely due to various factors.
• Counterparty Risk: BCI invests in futures contracts and is thus exposed to the risk that the other party in a futures transaction becomes unable to meet its obligations.
• Credit Risk: The ETF is exposed to credit risk due to its investments in fixed-income securities.

When compared with its peers, BCI stands out due to its diversified exposure and low expense ratio. ETFs such as the Direxion Auspice Broad Commodity Strategy ETF ( COM ) and the Invesco DB Optimum Yield Diversified Commodity Strategy No K-1 ETF ( PDBC ) have higher expense ratios and are not as diversified as BCI. Admittedly the more concentrated nature of COM and PDBC (in energy) has resulted in better relative performance as BCI has lagged, but the fund's diversification here might make more sense given broad global risks that could hurt anything more concentrated.

Conclusion

I think abrdn Bloomberg All Commodity Strategy K-1 Free ETF is a good fund to gain exposure to the commodity space. BCI's diversified holdings and low expense ratio make it an attractive choice for long-term investors. Just be mindful of short-term risks as a global slowdown and recession seems ever more likely.

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