New Commodity Basket ETN from Standard Bank

An interesting new Exchange Traded Note (ETN) which provides investors with access to the performance of a basket of commodities has recently been listed on the JSE. This product tracks a rand based index, calculated by Standard Bank (SBAFCI), which covers a diversified basket of commodities, weighted in accordance with their African production, over the past five years, of such commodities.

The index is constituted around four commodity sub-sectors – base metals, precious metals, energy and agriculture. The allocations ascribed to each of these commodity classes are weighted to ensure that no single commodity or sub-sector dominates the index. The index is calculated and published live on Bloomberg. The Commodity sector and individual commodity weights in the SBAFCI index are shown below.

(Click on image to enlarge)

Other salient details of this new product are:

The Africa Commodity Basket ETN makes use of futures markets to track the price of the various commodities included in the index. The product provides a total return. The return arises from: the use of near dated US dollar commodity futures; interest earned in US dollars from the margin accounts held in the futures contracts; and from the US$/Rand exchange rate. The investor in SBACI gets a spot traded rand based product listed on the JSE, without requiring to undertake the management and cost of the futures position and the dollar/rand exchange rate themselves.

The SBACI securities are recognised as “inward listed” so there is no impact on the foreign exchange allocation limits for individual and corporate South African investors, although institutional investors will require usage of their prudential allocation limits for offshore investments.

Potential Benefits of Investment in a Commodity Basket

1. Direct investment in commodities is increasingly viewed as an asset class in itself. As alternative investment assets become increasingly popular, due to the recent dismal performance of traditional asset classes, direct investment in commodities to benefit from the ongoing demand for raw materials by the rapidly expanding emerging economies has some merit.

ETFs and ETNs, including South Africa, have made this commodity asset class accessible on the major equity markets in a tradable liquid form to all investors.

2. The benefits of holding a portion of asset allocation in commodities, stem not only the diversification and risk variance benefits, particularly over longer periods of time, but also can provide superior performance. For instance, NewGold, which is an ETF tracking the physical global bullion price in rands on the JSE, has provided the following returns over the past 1 – 5 years.

3. The regulatory environment, such as the Regulation 28 requirements, are recognising direct investment in commodities as an approved investment and the convenience, relatively low cost and transparency of ETFs/ETNs provide a superior means of access to this asset class.

4. Exchange Traded Notes (ETNs) are JSE listed investments, but are not recognised as Collective Investment Schemes by the FSB. Accordingly, Financial Service Providers (FSPs) need a 1:8 license (Securities & Shares) in order to provide financial services in ETNs to their clients.

5. Exchange Traded Notes (ETNs) are obligations by the issuer to provide the total return of the asset or basket of assets being tracked. Accordingly, the credit rating of the counterparty (the issuer), in this case Standard Bank (AA), needs to be taken into account.

6. The Commodity Basket ETN offers a diversified and therefore relatively low risk access to the commodity asset class. Data provided by Standard Bank (which is backdated) suggests that this commodity index based product offers significant performance advantages over the JSE Top 40, the All Share index and CPI over time (see attached graph).

Simulated Historical Performance