Enhanced Commodities ETFs

What can broad commodities bring to a portfolio?

Finance

Inflation hedging

A broad commodities index captures key inputs to the real economy, so it stands to reason that commodities allow investors to participate in price increases

Money in hand

Diversification*

Over the long term, commodities have shown limited correlation with other asset classes1

 

Data Up

Return potential

Commodities offer exposure to long-term positive demographic trends: as the global population grows and becomes wealthier, demand for finite resources is likely to increase, in our view

Data

Participation in rising rates

The way broad commodity funds are constructed means investors receive regular income payments tied to government bond yields, allowing them to benefit when rates rise

*It should be noted that diversification is no guarantee against a loss in a declining market.

1. Source: LGIM analysis of BCOM, 16 March 2012-16 March 2022, data from Bloomberg

 

ENCO: An enhanced approach to broad commodities

The L&G Multi-Strategy Enhanced Commodities UCITS ETF (‘ENCO’) aims to provide broad-based exposure to commodities while applying a range of enhancements to futures contract selection.

This has been a live investment strategy for over a decade, and has outperformed the standard broad commodity index in every calendar year since its inception:

2011 LGIM ENCO Perf
2011 ENCO Table

Source: Bloomberg as at 29/12/2023. Live performance for the Barclays strategy starts in 2011 as the strategy was constructed and finalised in late 2010. The ETF, which aims to track the performance of the Barclays Backwardation Tilt Multi-Strategy Capped Total Return Index, was launched on 5 July 2021. For the period prior to 16 Nov 2018, the data shown for the Barclays Backwardation Tilt Multi-Strategy Capped Total Return Index is derived from the published index values which are based on simulated back-tested data. Simulated past performance data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Historical performance is not an indication of or a guide to future performance. Past performance is not a guide to the future. The value of any investment and any income taken from it is not guaranteed and can go down as well as up, and investors may get back less than the amount originally invested.

The investment strategy

Standard broad commodity indices have a static approach, meaning they may miss out on potential for additional returns based on the historical characteristics of the various commodities within the basket.

The L&G Multi-Strategy Enhanced Commodities UCITS ETF (‘ENCO’) adds a range of important enhancements:

  1. Constituent weights

    Overweight commodities with high backwardation

      • Backwardation tilt seeks to extract value from the shape of the futures curve by overweighting the 10 commodities that exhibit the highest backwardation level
      • Rebalance on a monthly basis

  2. Index enhancements

    Select the optimal point of the curve

      • Seasonal strategy for natural gas, gasoil and heating oil to account for the seasonal pattern of these commodities
      • Roll yield strategy for base metals and the remaining energy commodities to dynamically allocate along the curves with the aim of optimising the roll yield characteristics
      • Momentum Alpha strategy for agriculture and livestock sectors to dynamically allocate to points of the curve that have historically outperformed
      • Beta strategy for precious metals, as there is little out-performance potential due to the high efficiency of the precious metals markets

Awards

ENCO’s innovative approach and successful track record have been recognised by ETF Stream, which awarded the fund its 2023 Commodity ETF of the Year award*.

*Awards should not be considered a recommendation. Past performance is not a guide to the future.

ETF Stream Award WS

LGIM Talks - The what, why and how of commodities

What are broad commodities? Why might an investor want to gain an exposure to them as part of a diversified portfolio? And how does the use of futures contracts influence potential returns?

Michael Stewart, LGIM's Head of Pooled Index Strategy, offers a straightforward introduction to the much misunderstood 'third asset class'.

This podcast is hosted by Harry Brooks, Content Manager. All data is sourced from Eikon as at 5 February 2024 unless otherwise stated.

Commodities insights

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Key risks

The value of any investment and any income taken from it is not guaranteed and can go down as well as up, and investors may get back less than the amount originally invested. The risks associated with each fund or investment strategy should be read and understood before making any investment decisions. Further information on the risks of investing is available from LGIM’s Fund Centres.