BCM - COMT: Good Option But Not The Best

2023-04-08 01:42:55 ET

Summary

• COMT is a commodity ETF that gains exposure to the commodity markets through futures contracts.
• It has a structure that allows it to avoid being taxed as a commodity fund and distributing a K-1.
• Its past performance is relatively decent and its fees are low, but there are better options out there.

Thesis

The iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) is a decent choice among commodity ETFs. Its fees are relatively low and since its inception, it offered the exposure to commodities investors are looking for without damage to its AUM. It's also become a relatively big fund by now.

However, I found it to be a worse option when I compared it to a couple of other vehicles. Regardless of the incentive (long-term exposure to commodities or speculating on commodity prices), I don't think COMT ETF is attractive enough.

What does COMT Do?

COMT was issued by BlackRock, Inc. on October 15, 2014 in the United States and is co-managed by BlackRock Fund Advisors and Blackrock International Limited.

As a commodity ETF, it offers exposure to the commodity markets by tracking the price change of the S&P GSCI Dynamic Roll Total Return Index which is sponsored by S&P Dow Jones Indices LLC. The index measures the performance of futures contracts on commodities and rebalances once per year. The fund uses a representative sampling technique to track the index.

COMT's portfolio will usually consist of commodity futures, options on commodity futures, and commodity swaps. In addition, it will invest the cash balances that result from investing in the above instruments in investment-grade short-term fixed-income securities, such as TIPS, sovereign debt obligations, repurchase agreements, etc.

Since the fund invests in the futures contracts and the other commodity-related instruments by using a Cayman Islands wholly-owned subsidiary, it will invest up to 25% of its assets in those and the rest in fixed-income securities. Since the IRS classifies the investment in the subsidiary as an equity holding, the ETF doesn't have to distribute a K-1 and will be taxed at the usual income and long-term capital gains rates.

Performance

As of March 31, 2023, the fund's reported average annual return in the last 5 years was 5.27%.

But I would like to take a look at how COMT has fared since it was launched against its benchmark:

While COMT increased by 4.21% since its inception, meanwhile the index decreased by 9.64%. By not using a full-replication approach, the fund managed to do better by a wide margin.

Things are a bit mixed when it comes to similar options out there though:

Since the inception of Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF ( PDBC ), which is the youngest competing ETF above, COMT returned 4.75% while PDBC and the Invesco DB Commodity Index Tracking Fund ETF ( DBC ) returned 13.44% and 12.81%, respectively. PDBC is an actively managed ETF and DBC tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return. However, the rest of the commodity ETFs underperformed COMT.

From the viewpoint of those looking for a commodity ETF they will hold over the long term, Invesco's ETFs seem appealing because the rest didn't perform nearly as well over such a long period. But if you are considering buying and holding one of these, I think you might as well consider a commodity ETN like the iPath Pure Beta Broad Commodity ETN ( BCM ):

Since PDBC's inception, BCM significantly outperformed all of the above ETFs by returning 27.62%. But this is not the only reason why I prefer BCM. And since I don't want to derail this post, I suggest you take a look at the recent analysis I wrote about it if you are interested.

Fees

COMT has an expense ratio of 0.48%. Because of the relatively active and sophisticated for most investors strategy it employs, the fee makes sense.

In addition, COMT charges the lowest fees among its closest competitors listed in the table above. The fact that it manages a smaller amount of money compared to the rest makes this even more surprising.

But even though I think that its fees are low, PDBC's expense ratio of 0.59%, while a bit higher, is more reasonable within the context of the fund's long-term outperformance.

Risks

Before I close, let us examine some common risks that apply to COMT and a brief explanation for each.

• Counterparty Risk: Since COMT gets exposure to commodities through futures contracts, investing in it exposes you to counterparty risk which involves that the other party of a futures contract transaction won't be able to fulfill its obligation.
• Commodity Risk: The performance of COMT is dependent on the value of commodities which are in turn sensitive to political and regulatory developments, market events, war, etc.
• Credit Risk: Because COMT also invests in fixed-income securities, it's also subject to credit risk.

For the full list of risks as given by the issuer, read the relevant section in the prospectus.

Verdict

All in all, COMT is a decent low-cost vehicle to get exposure to commodity prices. But because of a couple of better options out there, I do not think buying it makes sense on the basis of a buy-and-hold strategy. It might not be a good choice even for speculators because of how much its performance deviated from its benchmark, making it not a very good proxy for commodity markets.

Isolated from other options like PDBC and BCM, it's not a bad choice at all. But I cannot rate it without considering such alternatives and I think neither should you. Hence, my Hold rating for now.

What do you think? Do you own COMT or just interested in buying it? Do you prefer another commodity ETF? Let me know in the comments below.

Also, consider following me as there are more to come. Thank you for reading and I'm looking forward to reading your comments.

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