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How to mitigate the cost of contango

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8 år sedan

den

12 april, 2017

Redaktionen

Asset Allocation Research How to mitigate the cost of contango

Highlights

An investor in commodities using futures contracts is not only exposed to the price of the raw material but also to the cost of holding a futures contract and rolling it from one contract to another.
To mitigate the cost of rolling (contango), investors need to add exposure to futures contracts with a longer shelf life where volatility is lower but expected return is also less.
Since 2002, a portfolio of both short and long maturity contracts outperformed short maturity only contracts by 6.5% per year, enhancing the Sharpe ratio to 0.26.

The mechanism of contango and backwardation continues to intrigue. While contango is known to reduce an investment’s overall return, questions remain as to whether it is possible to avoid it. In this note, we will focus on oil and particularly Brent, looking at the different elements investors should be aware of before considering investing in commodities as well as how to mitigate the negative impact of contango on the performance of a portfolio.

The futures curve

A futures curve is a series of prices of futures contracts that expire at different points in time (as illustrated below). Because each commodity follows its own fundamentals, the shape of the futures curve tends to vary from one commodity to another. Oil futures curves for example, tend to reflect market expectations on the future direction of oil prices.

The previous chart shows how the futures curve of Brent has moved since last year. The entire curve shifted upward with futures contracts at the short end of the curve benefitting most compared to contracts at the longer end of the curve.

The chart also shows that liquidity, measured by the traded volume on each futures contract, is higher at the short end of the futures curve where financial services and speculators tend to be concentrated. Smaller volumes at the longer end of the curve are usually commercial positions taken by consumers or producers of oil using the futures market as a hedge.

The impact of fundamentals

Because the futures curve is made of futures contracts that expire at different points in time, a change in the fundamentals will have variable impact on the price of each contract. An event such as the OPEC/non-OPEC agreement has the potential to keep the longer end of the future curve flat for a while as the market expects producers to continue controlling supply going forward. However, the current price support at the short end of the curve may vanish if the deal was to fail, deepening the contango at the short end of the curve.

The above chart shows that the correlation between the level of US oil inventories and oil prices at the short end of the curve is higher than the correlation with the longer end of the curve. Futures contracts at the short end are more sensitive to the change in supply, demand and inventories than the longer end. With US shale oil production on the rise, contango at the short end may deepen in the near term.

As a result, futures contracts with short-term maturity tend to be more volatile than contracts at the longer end as illustrated in the chart below. On the other hand, any gain or loss will be higher with short maturity contracts than long maturity contracts.

Long backwardation short contango

Because of the liquidity issue mentioned earlier, it is difficult for speculative investors to get exposure to the longer end of the curve. Most investors are therefore exposed to the short end of the curve where roll cost and volatility are the highest.

In this section, we look at whether it is possible to build a portfolio that will mitigate the negative impacts of contango on return by ensuring exposure to the best part of the curve. For this purpose, we have created the following three portfolios:

– Our benchmark is 50% in Brent futures contracts with an average maturity of one month and 50% in contracts that have an average maturity of two years.
– Two long only portfolios using the change in oil prices over the past month and the shape of the future curves at the end of the past month as trading signal. One portfolio invests in either the short end (Brent 1mth) or the longer end (Brent 2Yr) while the other portfolio will overweight the maturity highlighted by the signal and underweight the other maturity at the same time.

The performance chart shows that all the portfolios including the benchmark outperformed an exposure to the short maturity contract as holding Brent 1Mth since 2002 would have provided a return of 1.5% per year. Both long only portfolios outperformed the benchmark by 1.8% per year on average and the long only portfolio that alternates between Brent 1Mth and 2Yr outperformed Brent 2Yr by 0.2% per year.

In addition, the summary table highlights that both portfolios have a lower level of volatility than the benchmark and Brent 1Mth, allowing for an increase of the Sharpe ratio by 39% on average compared to the benchmark.
A maximum recovery time of more than 8 years for all the portfolios and constituents indicate that they have yet to recover to their previous peak in June 2008. With OPEC taking back control of their production level and US shale oil now profitable with a price around US$50/bbl., a recovery back above US$100/bbl. is simply unrealistic for the time being.

Looking at the performance since the beginning of 2016 when oil prices started to recover from a 13-year low, the long only portfolio with either Brent 1Mth or 2Yr is posting the highest Sharpe ratio at 0.69, followed by the long only portfolio combining both (0.66), Brent 1Mth (0.63), the 50/50 benchmark (0.57) and Brent 2Yr (0.50).

When using futures contracts to get exposure to commodities, an investor needs to be aware of the composition of the return the investor will get, as a gain in the commodity price does not necessarily translate in a gain in the investment’s overall return. When the futures curve is in contango, the cost of rolling from one contract to the other is deducted from the gain in price and will reduce the end return. While investors generally prefer an exposure to the short end of the curve due to liquidity, adding an allocation to futures contracts at the longer end can reduce the negative impact of contango and improve returns. Since 2002, the portfolio combining both maturities outperformed the short maturity exposure by 6.5% per year, enhancing the Sharpe ratio from -0.01 to 0.26. The strategy also allows for more diversification.

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

Liknande ämnen:Contango ETF Securities

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April in ETFs: Gold at New Highs, Crypto in Transition, and Moat Index Holding Steady

Publicerad

5 timmar sedan

den

2 maj, 2025

Redaktionen

As April winds down, markets remain on edge, with escalating tariffs and renewed trade tensions keeping volatility in focus. In this summary of our full-length newsletter, we spotlight gold and gold equities, both of which have surged to record levels. We also take a step back from the day-to-day noise in crypto to explore the broader shifts in the regulatory landscape in our latest Whitepaper and present Celestia in detail. Finally, we assess how Moat indexes have held up and evolved amid the turbulence.

Your VanEck Europe team wishes you a great read.

🥇 Are Gold Mining Equities Regaining Attention Amid Rising Gold Prices?

Gold & Gold mining equities tend to shine during stress periods

Source: VanEck, World Gold Council.

Gold has attracted renewed interest from investors amid concerns about inflation, currency volatility, and overall market uncertainty. Gold mining companies have recently reported improved profit margins and cash generation, with some initiating share buybacks and maintaining relatively strong balance sheets. Despite these developments, many continue to trade below their historical valuation averages.

While historical trends indicate that gold and gold mining equities have outperformed during certain periods of market stress, these patterns may not repeat under different economic conditions. Performance can be influenced by a range of factors including interest rates, central bank policy, geopolitical developments, and investor sentiment.

→ Read more

⚖️ Whitepaper Highlights: How New Crypto Regulations May Shape the Future

Cryptocurrencies are entering a new era. With the re-election of Donald Trump and the implementation of the European Union’s Markets in Crypto-Assets (MiCA) regulation, digital assets are moving into a landscape defined not just by innovation, but also by regulatory clarity.

MiCA’s structured and transparent approach aims to promote legitimacy, safeguard investors, and enhance trust in digital asset markets across Europe. It could also serve as a blueprint for other jurisdictions looking to regulate crypto effectively.

→ Read the Whitepaper Highlights

⛓️ Introduction to Celestia

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The modular blockchain thesis, which Celestia is leading, proposes separation of layers and respective responsibilities in the network.

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Note: This article in not accessible to our UK readers.

🌊 Riding the Gold Wave

Chasing the Vein: Fund Flows into Gold Miners

Source: Mining.com. Data as of 21 March 2025. Note: Data covers 493 funds with combined assets under management of $62 billion.

U.S. equity markets experienced significant declines during the month of March. Meanwhile, spot gold price recorded new all-time highs, surpassing the $3,000 per ounce mark on 14 March and closing at a record price of $3123.57 on March 31, a 9.30% ($265.73) monthly gain. As of 31 March, gold prices have risen by 93.61% over the past five years (1). Investors should keep in mind that past performance is not representative of future results.

The gold miners, as represented by the NYSE Arca Gold Miners Index (GDMNTR), outperformed significantly, up 15.51% during March (2). This gain reflects both their operational leverage to rising gold prices and market perceptions of relative value. However, gold miners can also be subject to heightened volatility, operational risks, and sensitivity to commodity price swings.

While gold and gold equities may serve as diversifiers in a portfolio due to their historically low correlations with many asset classes, investors should remain mindful of the inherent risks, including price volatility, currency movements, and shifts in investor sentiment that can lead to rapid reversals in performance.

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🌪️ Moat Stocks Weather Tariff Tumble

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At the same time, the SMID Moat Index lagged small and mid-caps in March. Smaller U.S. stocks were also impacted by global trade tensions and economic growth concerns with the broad small- and mid-cap benchmarks falling during the month. However, year-to-date, the SMID Moat Index remains ahead of the broader small- and mid-cap markets.

→ Read more

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To receive the full version, sign up here.

(1) Source: World Gold Council, ICE Data Services, FactSet Research Systems Inc.

(2) Source: Financial Times.

IMPORTANT INFORMATION

This is marketing communication. Please refer to the prospectus of the UCITS and to the KID/KIID before making any final investment decisions. These documents are available in English and the KIDs/KIIDs in local languages and can be obtained free of charge at www.vaneck.com, from VanEck Asset Management B.V. (the “Management Company”) or, where applicable, from the relevant appointed facility agent for your country.

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For investors in the UK: This is a marketing communication targeted to FCA regulated financial intermediaries. Retail clients should not rely on any of the information provided and should seek assistance from a financial intermediary for all investment guidance and advice. VanEck Securities UK Limited (FRN: 1002854) is an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811), which is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, to distribute VanEck´s products to FCA regulated firms such as financial intermediaries and Wealth Managers.

This information originates from VanEck (Europe) GmbH, which is authorized as an EEA investment firm under MiFID under the Markets in Financial Instruments Directive (“MiFiD). VanEck (Europe) GmbH has its registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, and has been appointed as distributor of VanEck products in Europe by the Management Company. The Management Company is incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM).

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Morningstar® Wide Moat Focus IndexSM, Morningstar® US Sustainability Moat Focus Index, Morningstar® US Small-Mid Cap Moat Focus IndexSM, and Morningstar® Global Wide Moat Focus IndexSM are trademarks or service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck’s ETFs are not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETFs. Morningstar bears no liability with respect to the ETFs or any securities.

Effective December 15, 2023, the carbon risk rating screen was removed from the Morningstar® US Sustainability Moat Focus Index. Effective December 17, 2021, the Morningstar® Wide Moat Focus IndexTM was replaced with the Morningstar® US Sustainability Moat Focus Index. Effective June 20, 2016, Morningstar implemented several changes to the Morningstar® Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to that date.

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BBVAE ETF är en spansk ETF som spårar Eurostoxx 50

Publicerad

6 timmar sedan

den

2 maj, 2025

Redaktionen

BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado (BBVAE ETF) med ISIN ES0105321030, strävar efter att spåra EURO STOXX® 50-index. EURO STOXX® 50-indexet följer de 50 största företagen i euroområdet.

Den börshandlade fondens TER (total cost ratio) uppgår till 0,20 % p.a. ETFen replikerar resultatet av det underliggande indexet genom full replikering (köper alla indexbeståndsdelar). Utdelningarna i ETFen delas ut till investerarna (halvårsvis).

BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado har tillgångar på 133 miljoner euro under förvaltning. Denna ETF lanserades den 3 oktober 2006 och har sin hemvist i Spanien.

Beskrivning BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado

Med BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado deltar investerare i ökningen av värdet på aktierna i de 50 största konglomeraten i euroområdet (euroområdet). Euro Stoxx 50-indexet inkluderar aktier från 8 länder i euroområdet: Belgien, Finland, Frankrike, Tyskland, Irland, Italien, Nederländerna och Spanien.

Handla BBVAE ETF

BBVA Acción Eurostoxx 50 ETF FI Cotizado Armonizado (BBVAE ETF) är en börshandlad fond (ETF) som handlas på Bolsa de Madrid.

Bolsa de Madrid är en marknad som få svenska banker och nätmäklare erbjuder access till, men DEGIRO gör det.

Börsnoteringar

Börs	Valuta	Kortnamn
Bolsa de Madrid	EUR	BBVAE

Största innehav

Värdepapper	Vikt %
ASML Holding NVNL0010273215	8,59%
Lvmh Moet Hennessy Louis Vuitton SEFR0000121014	5,60%
SAP SEDE0007164600	5,16%
TotalEnergies SEFR0000120271	4,59%
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The Art of Meme-ing: How Dogecoin Redefined Value

Publicerad

7 timmar sedan

den

2 maj, 2025

Redaktionen

Explore Dogecoin’s impact on crypto, turning internet memes into cultural and financial assets.

𝕋𝕚𝕞𝕖 ℂ𝕠𝕕𝕖𝕤:

00:00 – Intro

00:27 – Where do Memes come from?

03:13 – What are some of the first Memes you remember?

10:28 – Do these things have value?

14:04 – The different types of cryptocurrencies

17:20 – How did Dogecoin start?

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28:36 – How does it fit into the portfolio?

30:38 – Final thoughts

Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

Disclaimer

The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.

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