To download the Auspice March Blog as a PDF, click here.
This commentary is intended for general informational purposes only and does not constitute investment advice or a recommendation.
Tribute band, cover band - as a teenager, I played in them. Now I seem to get targeted daily on social media by them. Maybe because I am a big music fan, or maybe it's just my age. Not sure.
Either way, they can be good (often are) and entertaining. They serve a purpose. Concerts are expensive these days – if you want to see the Eagles at the Sphere or a hot band like Goose at Madison Square Garden, it will set you back hundreds, maybe thousands. Just a month ago, we were looking to catch one of Alan Jackson's last career performances and saw what seemed like a very reasonable price. Sure, we have to fly cross-country, but the concert itself was cheap. Then we realized it was a tribute show - one that appeared to be capitalizing on his upcoming final showing that was now sold out at the 69,000-seat Nissan Stadium in Nashville.
The tribute wasn't cheap and it wasn't the real thing. We passed.
This is exactly how I look at the myriad of replica commodity beta funds that are popping up to chase the commodity markets – particularly the commodity beta indices, BCOM and GSCI. Generally, these types of replica strategies may exhibit a high degree of correlation to their underlying commodity benchmarks – based on internal analysis, certain bank-sponsored products have shown correlations in the range of approximately 97% on a daily basis and over 99% on a monthly basis. In this analogy, the investor is buying the tribute band. Beta exposures are typically offered at a relatively low cost. ETFs that track broad equity indices (e.g., the S&P 500) can cost in the range of 3-9 bps. The cheapest US commodity funds that track the Bloomberg Commodity Index or its variations generally feature expense ratios around 0.25%–0.30%. However, in Canada, certain products have expense ratios that are as much as approximately double those of comparable U.S.-listed commodity index ETFs, with a high degree of correlation to their commodity beta benchmarks with broadly similar volatility and downside characteristics.
Chart 1 starts in September 2023, when one of these BCOM tracking products was launched in Canada. And no, we are not charting the tribute band. Who downloads a tribute band? We are showing the commodity beta benchmarks these products mimic (plus the 76bps fee) alongside our long-standing strategy, Auspice Broad Commodity, also inclusive of fees (see important notes below).
Chart 1: Beta Fund Proxy vs ABCTRI & COM ETF Since Sept 2023
Since October 2023
Growth of $1,000
Source: Auspice Capital Advisors
The Auspice Broad Commodity index has a 15+ year track record, with ETFs including CCOM in Canada and COM in the US. The index and tracking ETFs capture upside in commodities through a tactical long/flat “trend capturing” exposure. The replication funds, by contrast, are relatively young, virtually identical to the long-only BCOM index, and charge a non-beta fee for the privilege. Per Chart 1, the index has recently outperformed but is clearly more volatile given its static weights. That may not bother you when commodities are rising, but investing isn't one-way.
The replica/tribute isn't bad - it serves its purpose and passive commodity index exposure may be appropriate for certain investors depending on their investment objectives and preferences - but it is categorically different from the real thing. Can it perform better? Yes, at times it may. Rock stars can have off nights too. In the case of commodity beta, a long-only basket of markets, it can outperform when commodities all rally at the same time, but that may be rare and fleeting.
Commodities are a highly diverse asset class: Cotton is not like Crude, is not like Coffee, is not like Canola. The opportunity rotates depending on a myriad of global factors. It is in the corrections - often sharp (sometimes described as “escalator up, elevator down”) - where good strategy, repeatable process, and risk management prove their worth. Experience counts. And that long-term track record and experience may provide value relative to purely passive exposure (depending on market conditions) to such commodity beta replication. Since 2020, as shown in Chart 2, as the commodity cycle showed up and inflation protection became critical, the experience shines through - not only less volatility, but protection of client capital on the downside as shown in Chart 3.
Chart 2: Beta Fund Proxy vs ABCTRI & COM ETF Since Jan 2020
Since January 2020
Growth of $1,000
Source: Auspice Capital Advisors
Chart 3: Drawdowns Since Jan 2020
Drawdowns — Since Jan 2020
Source: Auspice Capital Advisors
Chart 4 demonstrates the long-term performance of the indices since Auspice started launching public products in 2010. One can expect the ETFs to track closely, as COM does. Per Chart 5, the annual risk (volatility) reward tradeoff over the same period clearly shows the Auspice Broad Commodity Index at far lower risk yet with similar returns.
Chart 4: Beta Fund Proxy vs ABCTRI & COM ETF Since Oct 2010
Since October 2010
Growth of $1,000
Source: Auspice Capital Advisors
Chart 5: Risk & Return by Year – ABCTRI VS Commodity Beta Fund Proxy
Risk & Return by Year — ABCTRI vs Commodity Beta Fund Proxy
Since October 2010
Source: Auspice Capital Advisors
So, while you can buy an index-tracking tribute band, be aware: in our view, many commodity beta replication products may be priced higher than investors might expect for passive exposure. At a time when commodity diversification and opportunity are arguably among the more important environments in recent decades, a fairly priced product from a tenured manager with a track record across a variety of environments is paramount. The real experience and tactical approach does cost more - but what's the cost of not having it? I will take the Eagles over the "Eagles Experience" every time.
IMPORTANT DISCLAIMERS AND NOTES
There is a substantial risk of loss in trading futures and options. Past performance is not necessarily indicative of future results. The views expressed are those of the author and do not constitute investment advice.
Commissions, trailing commissions, management fees and expenses may all be associated with investment funds. Please read the prospectus or applicable offering document before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
All data is believed to be reliable but has not been independently verified.
The indices shown (Charts 1-5) are for illustrative purposes only. Index returns do not reflect the deduction of fees, expenses or transaction costs. Past performance is not indicative of future results. The referenced indices are not directly investable. Also, where ETF or index proxies are used, they are intended to approximate the performance of the underlying strategy and may not reflect actual investable results.
These materials are provided for informational and educational purposes and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting and tax. Please consult with your own professional advisor on your particular circumstances.
Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. (the “Manager” or “Auspice”) makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise. Please read the applicable offering documents before investing.
This material may contain forward-looking statements, which were prepared for the purpose of providing general educational background information and may not be appropriate for other purposes. Certain statements in this document are forward- looking statements, including those identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “target”, “seek”, “will” and similar expressions to the extent they relate to an Auspice managed investment fund (the “Fund”), where applicable, and the Manager. Forward- looking statements are not purely historical facts but reflect the current expectations of the Fund, where applicable, and the Manager regarding future results or events. Such forward-looking statements reflect the Fund’s, where applicable, and the Manager’s current, reasonable beliefs and are based on information currently available to them. Forward-looking statements are made with assumptions and involve significant risks and uncertainties. Although the forward-looking statements contained in this document are based upon assumptions that the Fund, where applicable, and the Manager believe to be reasonable, neither the Fund, where applicable, or the Manager can assure investors that actual results will be consistent with these forward-looking statements. There is no guarantee that any forward-looking statement will come to pass. As a result, readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results or events to differ materially from current expectations.
Neither the Fund, where applicable, nor the Manager assumes any obligation to update or revise any forward-looking statement to reflect new events or circumstances, except as required by law.
The Manager may present the enclosed information in a blog – such blog may contain hypertext links to web sites owned and controlled by parties other than Auspice. We have no control over any third-party-owned web sites or content referred to, accessed by or available on such web site and therefore we do not endorse, sponsor, recommend or otherwise accept any responsibility for such third-party web sites or content or for the availability of such web sites. In particular, we do not accept any liability arising out of any allegation that any third-party-owned content (whether published on this or any other web site) infringes the intellectual property rights of any person, or any liability arising out of any information or opinion contained on such third-party web site or content.