Industry Updates

BlackRock expands swap investment universe for commodity ETFs

ROLL and ICOM will be able to invest beyond US Treasuries

Theo Andrew

a tractor in a field of wheat

BlackRock is expanding the investment universe for two swap-based commodity ETFs to “minimise tracking difference” versus their benchmarks.

The $1.4bn iShares Bloomberg Enhanced Roll Yield Commodity Swap UCITS ETF (ROLL) and the $1.9bn iShares Diversified Commodity Swap UCITS ETF (ICOM) will see the investment universe expand when using unfunded total return swaps.

Currently, both ETFs track indices that offer indirect exposure to commodities using a total return swap comprised of three-month US Treasuries.

Following the changes, the ETFs will be able to invest in money market instruments issued by governments, deposits with credit institutions, certificates of deposits and short-term bonds.

In a note to shareholders, BlackRock said to its cash management strategy would minimise the tracking difference versus the benchmark.

Over the past year, ROLL has returned 3.9% versus 4.6% for its benchmark while ICOM has returned -3.5% versus -3% for its index.

“When using the unfunded total return swaps, the fund currently invests its cash in US Treasuries,” it said.

“The expansion of the investible universe as part of the cash management strategy beyond US Treasuries will allow the fund to better track the measure of return incorporated within the index and minimise the potential tracking difference of the fund against the benchmark index.”

BlackRock added it does not expect the changes to impact the ‘synthetic risk reward indicator’ as it looks to improve the tracking error of the ETFs against their benchmark indices.  

Earlier this month, DWS dropped Deutsche Bank as index administrator in favour of Solactive on its popular Xtrackers EUR Overnight Rate Swap UCITS ETF (XEON).

The group said the changes were made to broaden the number of available swap counterparties.

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