Last year, CMCITR outperformed BCOM, its primary competitor. We believe a longer-term commodities bull market could resume in 2024 as they act as a hedge against global conflict and inflation.
CMCITR’s Roll Methodology Helped Temper Commodity Losses
Commodity index products were down in general for 2023. However, the UBS Constant Maturity Commodity Index (CMCITR) outperformed its primary competitor, the Bloomberg Commodity Index (BCOM) by a wide margin. CMCITR returned -1.41% while BCOM returned -7.91%, as of 12/31/23. CMCITR’s roll methodology, monthly rebalancing, and commodity weightings all contributed to the outperformance in 2023.
Two important things offset the overall decline in commodities last year: continued positive roll yield and positive returns on collateral. CMCITR continues to invest collateral in 3- and 6-month Treasury Bills, which yielded over 5% for most of the year. CMCITR’s constant maturity roll methodology generated slightly positive roll yields, while BCOM had slightly negative roll yields.
Most of the rollout performance came from the energy sector. The WTI crude oil and Brent crude oil forward curves were upward-sloping (Contango) in the first 3 months and downward-sloping (Backwardation) from 3 months to 3 years. CMCITR’s curve positioning from 3 months out to 3 years generated positive roll yield while BCOM lost money rolling its front-month crude oil position. Positioning in the energy sector also helped relative performance vs BCOM. CMCITR uses commodity consumption in its weighting methodology which results in a smaller U.S. natural gas allocation. U.S. natural gas fell sharply last year, declining by over 50%.
Commodity weightings also helped CMCITR’s outperformance in the agriculture sector. Cocoa and sugar were the best performers in the agriculture sector; London cocoa was up over 100%, U.S. cocoa was up 70%, and sugar was up 30%. BCOM was not invested in cocoa and had a smaller investment in sugar. Finally, CMCITR’s monthly rebalancing reduced overall volatility.
Precious Metals and Agriculture Rallied; All Others Struggled
The precious metals sector was the best-performing sector, rising an estimated 11% for the year due to strong gains in gold. Most of the gains came late in the year when interest rates declined as the Federal Reserve’s (Fed) signaled the end of the tightening cycle. The U.S. dollar also declined on the Fed’s signal late in the year, which coupled with falling interest rates, helped gold finish the year up 13%. Rising geopolitical tensions following the October 7th Hamas attack on Israel also helped gold rally as a safety asset in the 4th quarter.
The agriculture sector posted an estimated 2.5% return led by gains in cocoa, sugar, and coffee. However, the sizeable gains in these commodities were offset by a large decline in corn (-19%) and wheat (-24%). A better-than-expected crop in Brazil caused the decline in corn prices.
The energy sector fell an estimated 5.7%, led by a 50% decline in U.S. natural gas prices. The demand for natural gas was reduced due to the mild winter and summer weather which was concurrent to the increase in U.S. production. Starting in 2025, the U.S. is expected to have more LNG (liquid natural gas) export capacity, which should help offset the continued strong U.S. production. CMCITR’s smaller allocation to natural gas was the biggest factor in its outperformance versus BCOM; CMCITR’s allocation was 3.5% while BCOM’s was 8.5%.
CMCITR had a small gain in both WTI and Brent crude oil despite declines in both commodities. The U.S. surprised the market by producing more than 1 million barrels of crude oil per day than estimated in early 2023. The stronger-than-expected production came from U.S. shale oil in Texas, some of which was due to completing drilled but uncompleted oil wells, known as DUCs. The inventory of DUCs has fallen sharply so U.S. shale oil production is less likely to surprise on the upside this year. The positive roll yield offset small declines in both crude oil positions.
The industrial metals sector declined by an estimated 4%, led by a 44% drop in nickel prices. China’s disappointing economic growth was the main reason for the decline in industrial metals prices. Copper prices rallied late in the year to finish up 7%. However, the future of the global supply of copper seems uncertain and may not meet the expected growing demand over the next few years. Panama’s closure of a very large copper mine due to environmental concerns adds to the potential future supply constraints. Overall, supply disruptions and security are becoming a major concern in the industrial metals sector.
The livestock sector declined by 8% due to a sharp decline of 27% in lean hog prices. Cattle prices remained strong, gaining 6% on the year.
Outlook: Political Conflicts are Paving the Way for Higher Global Commodity Demand
The longer-term bull market in commodities could resume in 2024. Supply will continue to be challenging as the world transitions away from traditional energy to more renewable sources of energy. Global geopolitical conflict is slowing the transition and increasing both supply and resource security risks. As we enter 2024, global shipping is being disrupted by conflict in the Red Sea and reduced capacity through the Panama Canal. Both shipping bottlenecks are causing delays due to longer shipping routes and causing higher fuel consumption. Both the Russian-Ukraine and Israel-Hamas conflicts are continuing and could escalate. Additionally, if the Fed starts another easing cycle the U.S. dollar is likely to decline and global growth outside the U.S. could reaccelerate, leading to higher global commodity demand. Commodity index products are true portfolio diversifiers and a hedge against global conflict and inflation.
Estimated Roll Yield Contribution 2023
Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
2023 Index Sector Weightings
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The UBS Bloomberg Constant Maturity Commodity Index (CMCITR) is a total return rules-based composite benchmark index diversified across 29 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural, and livestock.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
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Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
VanEck CM Commodity Index Fund: You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes, or political or regulatory developments. The value of a commodity-linked derivative is generally based on the price movements of a commodity, a commodity futures contract, a commodity index, or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. An investment in the Fund may be subject to risks which include but are not limited to, risks related to active management, commodities and commodity-linked derivatives, commodity regulatory, credit, derivatives counterparty, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes, and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest rate, valuation, and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
VanEck CMCI Commodity Strategy ETF: An investment in the Fund may be subject to risks which include, among others, risks related to investing in the agricultural commodity sector, commodities and commodity-linked instruments, commodities and commodity-linked instruments tax, derivatives counterparty, energy commodity sector, metals commodity sector, U.S. treasury bills, Subsidiary investment, commodity regulatory and tax risks with respect to investments in the Subsidiary, gap, cash transactions, credit, debt securities, interest rate, derivatives, commodity index tracking, repurchase agreements, regulatory, market, operational, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and commodity index-related concentration risks, all of which may adversely affect the Fund. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes, and futures entails substantial risks, including the risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest rate, valuation, and tax risks. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities. The level of derivatives counterparty risk may be heightened due to the Fund currently only having a single counterparty available with which to enter into swap contracts on the Index.
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