Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (NYSEARCA: BCI) captures the price movement of the most important futures contracts in the fields of energy, agriculture, metals and even livestock. This is a segment that has enjoyed increased visibility over the past year amid supply chain disruptions and global inflationary trends supporting positive momentum. Indeed, BCI has returned over 25% in 2022, which contrasts with the massive sell-off in stocks and bonds amid broader market volatility.
We like BCI as a good option for exposure to this important alternative asset class that can serve as a portfolio diversifier and core portfolio over the long term. The fund’s “K-1 Free” structure means that investors need not worry about the tax implications of investing directly in futures, as BCI reports income and distributions on a standard Form 1099, like any other stock and ETF. We are bullish on commodities and expect more upside from BCI this year.
What is the BCI ETF?
BCI passively tracks “The Bloomberg Commodity Index” which consists of 23 products which are weighted by trade volume and global production levels with criteria of global importance. The futures portfolio is collateralized by short-term US Treasury bills which generate interest income which helps balance some of the underlying costs and supports the overall portfolio management process.
Looking at the current holdings of the BCI portfolio, gold futures are technically the largest position at 14% in the fund, followed by natural gas futures at 11% and crude oil at 9%. Sector weightings are more relevant with ‘energy’ accounting for 36%, followed by agriculture at 27%, and precious metals at 18%.
It should also be mentioned that BCI distributes an annual dividend based on underlying realized earnings and ordinary income. For 2021, the per share $4.46 amount was paid at the end of December corresponding to a yield of 16% while the net asset value was reduced by the same amount. This was an exceptional circumstance based on the timing of market conditions. Keep in mind that the annual payout is variable based on the underlying performance of the portfolio each year, so it’s unclear what the forward yield in 2022 will be, but the vehicle functions as a compelling income vehicle as a component of total return.
Commodity price performance, particularly energy, agriculture and industrial metals, has a cyclical component. This means that global macroeconomic trends between production and supply levels versus demand trends are the main drivers of price action. On the other hand, it is also clear that each type of commodity is exposed to very different factors, specific to their markets.
This year, energy and agriculture have outperformed as global economic activity recovers from the pandemic, while the Russian-Ukrainian war has added an additional layer of disruption to global trade, further pushing up prices. price.
The chart below puts BCI’s year-to-date total return of 25% in the context of the trends in exchange-traded funds that track commodity prices, which we use here for reference. The United States Natural Gas ETF (UNG) stands out with a 157% return, followed by a 40% gain from the United States Oil Fund (USO) and a 24% return from the Teucrium Corn ETF (CORN). In contrast, iShares Silver Trust (SLV) lagged, down 19% in 2022. In other words, BCI is a mix of all these underlying markets, capturing major commodity themes as that asset class.
Naturally, if we were certain that natural gas would continue to be the big winner going forward or that silver would heroically reverse higher, a tactical position in one of these funds might make sense. The appeal of BCI comes down to the inherent uncertainty of investing, using a strategy based on diversification. Whether Crude Oil or Grains lead higher from here, the BCI will be balanced in the high level charts.
It is worth considering the alternative ETFs in this category which each follow a slightly different strategy, but which are nevertheless intended to follow “commodities”. On this point, a key distinction in other names like the Invesco DB Commodity Tracking (DBC) ETF and the iShares GSCI Commodity Dynamic Roll Strategy (COMT) ETF is that both have a greater lean towards energy sector futures, which currently make up 63% of their fund holdings.
By this metric, DBC and COMT both outperformed BCI in 2022 with a return of 28% and 29% given their exposure to oil and natural gas momentum. There is also the First Trust Global Tactical Commodity Strategy Fund (FTGC) which is actively managed but has strayed from the group with a weaker performance this year, returning only 20%.
While we don’t claim that one fund is “better” or worse than another, BCI stands out for its low category expense ratio at just 0.25% compared to COMT’s 0.48%, 0.85% for DBC and 0.95% for FTGC. We also see its higher relative positioning in agriculture as a long-term strength.
Forward-looking analysis and commentary
The commodity pattern has been a recent correction below their early year highs. The BCI is currently down about 10% from its peak in early June. Several factors contributed to the pullback, including a strong dollar as well as weaker economic indicators from China, the world’s largest consumer of commodities.
Going back to the initial headlines of the Russian-Ukrainian invasion, WTI and Brent crude oil briefly traded above $130 a barrel before falling to a current level near $90.00. Similarly, agricultural markets saw near-record prices amid fears that exports from the region could be blocked, leading to tighter supplies globally. Fast forward, even though the geopolitical situation remains tense, easing supply chain disruptions have helped ease price pressures.
That being said, we view this latest drop as a new buying opportunity ahead of another leg higher. We can cite corn and wheat futures, as well as oil, as examples where prices appear to have bottomed out, with selling likely going too far. A scenario in which global economic conditions and underlying demand trends remain resilient may support a rebound in all commodities from here.
The BCI ETF is well positioned to capture these trends and resume its ascent. Longer term, the dynamics of a growing global population in the face of limited natural resources and the continued expansion of the global money supply of fiat currencies should support positive commodity returns for many years to come.
The BCI ETF is a high quality, low cost fund that performs exactly as expected for exposure to commodity price performance. The fund can operate in the context of a larger portfolio that includes stocks and bonds to add diversification into an alternative asset class.
In terms of risks, the most bearish scenario for commodities and the BCI ETF would be a deterioration in the economic environment defined by collapsing consumer spending and a sharp drop in global trade levels. A bullish call here on BCI is based on a more optimistic view of the macro outlook to keep price pressures high, supporting positive returns in agriculture, energy and industrial metals.