While the majority of investors allocate their dollars primarily between equities and fixed income, there are a number of alternative assets that may add value to the portfolio over time. Furthermore, the advent of ETFs has made it easy for investors to gain exposure to areas of the financial markets that were previously reserved for the savviest of investors. One such example is the Commodity asset class. Today, investors can select from upwards of 140 ETFs and ETPs to introduce commodity exposure into the portfolio, instead of trading futures contracts. One of the newer ETF products to hit the market within this space is the Elkhorn Commodity Rotation Strategy ETF DWAC, which uses the Dorsey Wright methodology to target those commodities with the strongest relative strength characteristics.
One of the main factors which helps enable a relative strength based strategy to generate strong returns is ample performance dispersion among the investable universe. The most popular commodities discussed by mainstream media are precious metals (gold, silver, platinum) and energy (crude oil), but that only scratches the surface of this asset class as a whole. For example, the “softs” complex (which includes Sugar, Cotton, Cocoa, Orange juice, and Coffee) certainly isn’t making CNBC headlines on a daily basis, but Sugar futures are the top performing commodity on the year and have registered an impressive gain of over 50% in 2016. On the flip side, agricultural Commodities such as Live Cattle (-20.22%), Wheat (-20.79%) and Lean Hogs (-25.27%) continue to lag and remain in very firm downtrends. At some point these trends will change, but the dispersion which exists within the asset class remains wide year over year.
Generally speaking there are about 5 different commodity sectors: precious metals, industrial metals, livestock, agriculture, and energy. One of the most commonly used benchmarks for the asset class is the S&P Goldman Sachs Commodities Index (GSCI). It was launched in May 2007 and holds approximately 24 different commodities. The index allocations are world production weighted based on the average quantity of production of each commodity. Currently, the index is allocated as follows: Energy (70.44%), Industrial Metals (8%), Precious Metals (3.68%), Agriculture (12.78%), and finally Livestock (5.11%). As a result, energy is the tail that wags the dog in this instance, accounting for more than two-thirds of the index’s performance. This is not unusual to see across many broad based commodity ETFs, making the DWAC quite different from the rest of the pack in terms of the exposure it offers.
The underlying index follows a Dorsey Wright relative strength based strategy to make its allocation decisions. The product also implements the dynamic roll methodology in order to avoid cost of carry issues at futures expiration. The universe for the underlying index includes 21 different commodities, and the index will target the top five on a monthly basis with a 20% weighting in each. The ability to tactically rotate through a broad universe of commodities and concentrate within the top performing sectors while eliminating exposure to the weak sectors is what makes this product both dynamic and unique. As of 9/30/2016, the current allocations in DWAC are as follows: Sugar, Silver, Coffee, Zinc, and Cotton. Additional information regarding historical allocations and other product info can be found on the DWAC factsheet.
DWAC vs. GSCI Equity Curves
Below we have as we plotted the equity curves in order to help compare historical performance of DWAC vs. GSCI.
DWAC inception date: Sept 21, 2016, GSCI inception date: May 7, 2007 – data prior to inception is based on a back-test of the underlying indexes. Please see the disclosures for important information regarding back-testing. DWAC Returns are calculated on a total return basis. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
DWAC vs. GSCI Performance
The table below gives a detailed perspective on the historical performance for each index. Notice that DWAC offers a higher annualized return, and does so with lower annualized volatility. Additionally, losses have been relatively contained when compared to the benchmark, while periods of outperformance have been instrumental in cumulative performance.
- Cumulative Returns: DWAC (+576.80%) vs. GSCI (-18.35%)
- Annualized Returns: DWAC (+10.02%) vs. GSCI (-1.01%)
- Volatility (Annualized): DWAC (22.23%) vs. GSCI (28.19%)
- Largest Annual Loss: DWAC (-20.24% – 1998) vs. GSCI (-46.49% – 2008)
- Largest Annual Gain: DWAC (+50.91% – 2006) vs. GSCI (+49.74% – 2000)
- # Years Outperforming: DWAC (12 years) vs. GSCI (8 years)
- Total Performance in Outperforming Years: DWAC (+253.90%) vs. GSCI (+73.11%)
DWAC inception date: Sept 21, 2016, GSCI inception date: May 7, 2007 – data prior to inception is based on a back-test of the underlying indexes. Please see the disclosures for important information regarding back-testing. DWAC returns are calculated on a total return basis. Returns do not include all potential transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Performance data for the model is the result of hypothetical back-testing. Performance data for prior to inception date is the result of backtested underlying index data. Investors cannot invest directly in an index. Indexes have no fees. Back-tested performance results have certain limitations. Back-testing performance differs from actual performance because it is achieved through retroactive application of an investment methodology designed with the benefit of hindsight. Model performance data as well as back-tested performance do not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.