DJCB - DJP: The Commodity ETN King Is Not For Me

2023-04-16 05:42:58 ET

Summary

• DJP is a decent way to get exposure to the commodity markets if you're looking for a high trading volume and the structure of an ETN.
• Predictably, its price performance has been underwhelming over the last 10 years.
• Buy/Hold investors may be interested in BCM as an alternative because of its better risk-adjusted returns over the long term.

Thesis

The iPath Bloomberg Commodity Index Total Return ETN (DJP) may be a good fit for someone who is looking to time the commodity markets via an ETN. Because I don't see the value in this, however, I wouldn't invest in it. I think that there are ETFs out there that can be of greater service to traders.

iPath Pure Beta Broad Commodity ETN ( BCM ) is a better ETN choice if you are looking for long-term exposure to commodity markets as evidenced by its superior risk-adjusted returns. I provide more details below.

Understanding DJP

DJP was issued by Barclays Bank PLC on 6 June, 2006 and matures on 12 June, 2036. With $708.09 million in assets under management, it's the largest ETN issued by Barclays.

The ETN provides exposure to commodity markets by tracking the Bloomberg Commodity Index Total Return index, which as of 31 March 2023 consisted of 10 commodity futures contracts (WTI crude oil, Brent crude, soybeans, corn, gold, copper, natural gas, silver, aluminum, and soybean meal), with a 27.74% allocation in the energy sector.

As an ETN, DJP eliminates the tracking error by promising to deliver investors the difference in the price of the index from the time of purchase to maturity. Additionally, DJP provides a tax benefit in the form of not having to distribute any capital gains to investors; a tax event only takes place when you realize a profit after selling the ETN.

At the same time, Barclays is not obligated to issue and redeem notes, which may pose a significant risk for traders. Vehicles like DJP are, in my opinion, only fit for those intending to hold for the long term.

Performance

Below, I am comparing DJP with two other commodity ETNs issued by the same bank in regard to price performance:

In the last 10 years, DJP's price decreased by 17.59%. It outperformed the iPath S&P GSCI Total Return Index ETN ( GSP ) and underperformed BCM.

Besides the positive price change BCM has realized, it also has the longest maturity date of the three, making it less risky for being called by Barclays soon. In any case, the margin by which it outperformed the other two makes it more attractive. I suggest you take a look at the post where I talk about this ETN in more detail if you're interested.

The next thing I want to take a look at is how volatile and correlated to the market DJP has been.

Since 04/21/2011, it recorded a maximum drawdown of 70.19% and a standard deviation of 16.59%. Surprisingly, BCM's returns weren't a result of a more volatile price, with a maximum drawdown of 57.81% and a standard deviation of 15.58%. And as the chart hinted at above, GSP was much more volatile and more sensitive to the market than DJP and BCM.

Evidently, BCM's risk-adjusted returns have been much better than DJP's. From the standpoint of a need for long-term exposure to commodities to diversify a portfolio, BCM looks like the better bet here.

Fees

The expense ratio for DJP is 0.7%; a fair fee in my opinion within the context of the benefits the ETN structure promises to offer. BCM has the same expense when including the annual futures execution fee that it charges and GSP charges a 0.75% expense ratio.

DJP is only expensive from the standpoint of its underwhelming long-term performance compared to BCM and this is only relevant for a buy/hold investor. The very small size of BCM's AUM and its consequent significantly lower trading volume can make it more "expensive" than DJP for a market-timing investor. To a less extreme degree, the same applies to GSP.

Risks

Here are some of the most significant risks that you should be aware of when it comes to investing in DJP:

• Call Risk : Since DJP is a debt security, Barclays has the right to call it anytime and, therefore, your capital is at risk if this is done at an unfavorable time for you. However, this risk doesn't appear as significant after you account for the one out of the dozen ETNs Barclays has issued over the years which has been called after 17 years of trading history.
• Credit Risk : DJP is subject to credit risk as it's a debt security backed by Barclays.
• Issuance and Liquidity Risk : Because Barclays is not required to issue and redeem notes when it comes to ETNs, DJP's volume can decrease if the bank decides to suspend such activities as it did about a year ago.

If you're interested in the full list of risks, check the relevant prospectus .

Verdict

DJP is the best vehicle for getting exposure to commodity markets if you're looking for an ETN with a high trading volume. However, as I personally don't see the value in market-timing with ETNs, I believe BCM to be the better option here.

BCM has outperformed DJP over a long period and is slightly less volatile and correlated to the market. For this reason, my HOLD rating is based on the existence of BCM and not some significant drawback I could find with investing in DJP.

What is your opinion about DJP? Also, let me know what you think about this post and if you think I missed something important I could include in the next one. Thank you for reading.

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