COMT - COMT: Worse Risk-Adjusted Returns With Heavy Energy Tilt

2023-07-30 00:41:12 ET

Summary

• Commodities have not performed well as a safe haven investment compared to equities, particularly tech-growth stocks.
• The iShares GSCI Commodity Dynamic Roll Strategy ETF has seen mixed inflows and outflows over the past 3 years.
• The performance of COMT is heavily influenced by energy prices and oil & gas stocks, with the top holdings being in the energy sector.

With inflation at record-high levels, commodities have been perceived as the probable ‘safe haven’ as natural inflation hedge. However, markets did not well reward commodities year-to-date while equities experienced significant gains through a concentrated pool of tech-growth stocks. Over the 3Y period, the iShares GSCI Commodity Dynamic Roll Strategy ETF ( COMT ) did not manage to gain much traction, where inflows were mostly concentrated in mid-2021 while there were major outflows during periods in 2022 and 2023. With changing macroeconomic outlook as inflation cools across most developed economies, it’s worth diving into the commodities space to understand the portfolio characteristics of the ETF.

Performance Review

COMT has the objective to “track the investment results of an index (S&P GSCI Dynamic Roll Total Return Index) composed of a broad range of commodity exposures with enhanced roll selection, on a total return basis” , which means that it provides a rule-based strategy to gain exposure to commodities (not the miners/ producers), across energy, metals, agriculture and livestock sectors through the use of futures. In fact, one of the key selling point of COMT, as written on the fund’s site, is indeed to ‘potentially provide protection against inflation’. As mentioned, the YTD return of COMT is nearly flat which significantly underperformed the broad equities market ( SPY ) driven by the tech rally. However, it slightly outperformed its peer ETFs, including BCD and DBC which both aim to provide similar exposures, while underperforming the basic materials select sector index ( XLB ) consisted of many materials/ mining companies that tend to correlate well with commodity prices.

Since January 2021, commodities significantly outperformed the broad market and the basic materials sector, where COMT returned nearly 60% between DBC and BCD. However, this is less attributable to its role as inflation hedge but rather caused by the supply shock since the pandemic, which drove commodity prices up to record levels.

Deep Dives

COMT aims to provide commodity exposures across energy, metals, agriculture and livestock sectors, where its top 3 holdings (ignoring cash) are all from the energy sector which include crude oil (20.5%), brent crude (19.3%), and low sulfur gas oil (9.9%) - and that’s close to half of the entire fund. Therefore, any prospective investor should be aware of the significant energy tilt in COMT as the performance will more likely track the energy prices and oil & gas stocks. However, it is worth mentioning that this is not especially unique to COMT as many diversified commodities index do have similar exposures and weighting.

Decomposing its YTD return to the relevant commodity baskets below, the outperformance of the agriculture basket was mainly overshadowed by the negative returns from the energy sector.

Diving into the performance across energy commodities, natural gas suffered a significant fall in prices after record high levels reached back in 2022 following the European energy crisis. The fund does not have significant direct exposures to natural gas, which avoided the huge plunge in price.

Meanwhile, it’s worth pointing out that COMT has a superior dividend yield at close to 30% during the past two years where commodity prices experienced significant gains - that may be something interesting and extremely lucrative to look out for.

Risk Analytics

COMT has a relatively high annualized volatility at ~35%, which is much higher than the broader market (SPY and XLB), as well as its peers (BCD and DBC) both at around 20%. One key reason may be the lack of Gold exposure in COMT (at around 4%) as a low-volatility instrument, where BCD has 16% exposure, and DBC has 9.5%.

The 5Y Bollinger chart below also visualizes the price volatility of COMT on a 3-month rolling basis, where it has been trading close to its +1 sigma above the rolling mean - indicating a potential overbought.

Relative to the broad market ((SPY)), COMT has been underperforming since the start of year with its rolling-alpha trailing at sub-zero levels, except during the short-lived spike back in January-February. Meanwhile, the rolling-beta chart also demonstrates the sensitivity of COMT over SPY, which has been very close to 1 since April this year. This indicates that COMT has had very similar price movements to the broad market in the recent months, but expected to also be short-lived given the longer-term historical data.

Conclusion

In short, COMT does a decent job at providing diversified commodities exposure to investors, even with its heavy energy tilt which has slightly underperformed year-to-date. Besides, it appears much more volatile than its peers despite generating similar returns, likely due to its lower exposure to safe-haven metals such as Gold.

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