8 Jul 2021
LGIM launches Multi-Strategy Enhanced Commodities UCITS ETF
Expansion of commodities ETF range offers investors diversified exposure to the commodity futures market through a multi-factor strategy
Legal & General Investment Management (LGIM) has today launched the L&G Multi-Strategy Enhanced Commodities UCITS ETF (‘the Fund’), offering investors diversified exposure to the commodities futures market, as they seek to manage inflation and participate in investment opportunities across different commodities throughout the market cycle.
The Fund will seek to track the performance of the Barclays Backwardation Tilt Multi-Strategy Capped Total Return Index (‘the Index’). The Index is comprised of all commodities in the Bloomberg Commodity Index and provides a return equivalent to a fully collateralised investment in a diversified portfolio of commodity futures across the following five commodity groups: Energy, Precious Metals, Industrial Metals, Livestock and Agriculture.
The Fund employs a multi-factor strategy, applying the following enhancements to provide optimal exposure to specific commodities by rolling the respective futures contracts dynamically:
- Seasonal strategy: applied to commodities such as Heating Oil, Gasoil and Natural Gas which have historically exhibited strong seasonality. The index shall invest into seasonal futures contracts that tend to be the most liquid contracts throughout the year and provide exposure to a commodity at key points during a production or demand cycle, where supply/demand dynamics systematically affect prices.
- Roll yield strategy: applied to the rest of the energy commodities and industrial metals in the index. For such commodities, the index shall seek to locate the position on the commodity futures curve with the most favourable implied roll yield.
- Momentum strategy: applied to agriculture and livestock commodities which have historically been strongly influenced by crop and breeding cycle, as well as exogenous factors such as weather. The index shall invest into futures contract which has exhibited the highest historical annual outperformance over the nearby futures contract. No enhancement is applied for precious metals such as Gold and Silver.
The Fund is initially being listed on the London Stock Exchange, targeting professional investors who are evaluating the strategic role of commodity futures investments as part of a multi-asset portfolio. It builds on LGIM’s existing Commodities ETF range which includes the L&G All Commodities UCITS ETF and the L&G Longer Dated All Commodities UCITS ETF.
LGIM’s Index team has a wealth of experience in index funds and over the last 25 years has grown into one of the largest global providers. Backtesting of the index from 2011 onwards*, evidences the enhanced strategies applied to each commodity group in this fund and the backwardation tilt multi-strategy index can help provide outperformance against core commodity benchmarks.
This launch builds on the demand seen across LGIM’s commodities ETF range for investment solutions with low correlation to other asset classes, including traditional stocks and bonds, allowing clients to tap into the growth opportunities in the real economy as the global recovery gathers pace.
This launch reflects LGIM’s continued commitment to active index design and is another example of innovation where investment strategies can be constructed to focus on the potential for stronger returns, rather than traditional benchmark returns.
With track record of one of our other commodities ETFs, we’ve proven that longer dated futures help with long term performance and drawdown management, by reducing the volatility caused by near-term futures investments. Through risk mitigation and a deep understanding of the return drivers in the commodities markets, we’re aiming to deliver greater value for clients. This investment strategy considers the risks and opportunities associated with the seasonality of certain commodities investments, roll yield enhancements in managing futures and the momentum effect of certain agricultural investments.
Howie Li, Head of ETFs at LGIM