Commodities Commentary 2018

The Auspice Broad Commodity Index (ABCERI), the benchmark index for the Direxion Indexed Commodity & Income Strategy Fund (DXCTX) and the Direxion Auspice Broad Commodity Strategy ETF (COM), ended the year slightly down at -0.98%.  ABCERI compared favorably to some of the most notable commodity benchmarks that were down significantly in 2018.

Below is a table of the 2018 calendar year returns for the (ABCERI) compared to several well recognized long-only commodity indices.  

2018 Calendar Year Returns for Broad Commodity Indices (Excess Returns)

Index 2018 Total Return
The Auspice Broad Commodity Index (ABCERI) -0.98%
Standard and Poor Goldman Sachs Commodity Index (S&P GSCI) -13.82%
Bloomberg Commodity Index (BCOM) -11.25%
Deutsche Bank Liquid Commodity (DBLCI) -12.91% 

Source: Bloomberg. Date Range: As of 12/31/2018. Past performance does not guarantee future results. The three indexes above are composite indexes of commodity sector returns representing unmanaged, unleveraged, long-only investment in commodity futures that are broadly diversified across the spectrum of commodities. One cannot invest directly in an index. Index descriptions provided below.

The ability of the ABCERI to reallocate individual commodities that show a downward price trend to cash, proved to be an effective measure in mitigating overall downside risk relative to its peers. The table below highlights the favorable risk/return characteristics of ABCERI compared to the same indexes.  

The ABCERI vs. Long-only Commodity Indexes: 10/01/2010-12/31/2018

Excess Return Numbers ABCERI S&P GSCI BCOM DBLCI
Annualized Return -1.37% -8.33% -7.05% -5.31%
Annualized Volatility 8.86% 18.61% 13.82% 15.76%
Correlation 100.00% 62.13% 70.73% 68.66%
Max Drawdown -36.76% -67.87% -58.46% -60.85%

Source: Bloomberg. This data begins on 10/01/2010, the inception of the Auspice Broad Commodity ER Index. Index returns and correlations are historical and are not representative of any Fund performance. Total returns of the Index include reinvested dividends.

It was a difficult year for the majority of commodities since most finished 2018 in the red. The strengthening US Dollar, continued concern over trade wars, and more recently, the potential for a global growth slowdown, were the main culprits that led to the overall decline.

With regards to the ABCERI, the Energy complex sector generated the most significant gains for the year (all four of the components exhibited positive performance) with Crude Oil and Natural Gas leading the way.  Despite the majority of energy markets pulling back significantly in the fourth quarter, as a result of concerns relating to oversupply and decreasing demand, the strategy was able to preserve profits made during the year by moving to cash positions in all components except Natural Gas during the quarter.   

The Agricultural sector produced the largest losses for the strategy, as the ongoing trade war rhetoric made for choppy markets which proved difficult to navigate. In addition, the Metal sector produced slight losses due to a strengthening U.S. Dollar, however, losses were mitigated by allocating out of Silver and Copper to cash for part of the year. The lone bright spot was Gold which provided a positive return within the strategy for the year.     

As we move into 2019, Commodities represent a potentially undervalued asset class, trading at roughly 50 year lows compared to the S&P 500.   As the Fed becomes more dovish on interest rates, the U.S. Dollar could weaken, which tends to be a tail wind for commodities.  In addition, a resolution of the trade war conflict along with continued Chinese government stimulus could be the potential recipe for higher commodity prices in 2019.

 


Index Descriptions:

  • Auspice Broad Commodity ER Index (ABCERI) – Aims to capture upward trends in the commodity markets while minimizing risk during downward trends. The index uses a quantitative methodology to track either long or flat positions in a diversified portfolio of 12 commodity futures covering energy, metals, and agriculture. The index incorporates dynamic risk management and contract rolling methods.
  • S&P Goldman Sachs Commodity Index (S&P GSCI) – a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.
  • Bloomberg Commodity Index (BCOM) – A broadly diversified index that allows investors to track 19 commodity futures through a single, simple measure.
  • Deutsche Banc Liquid Commodity Index (DBLCI) – Composed of futures contracts on 14 of the most heavily-traded and important physical commodities in the world.

Definitions:

  • Standard Deviation – A measure of the dispersion of a set of data from its mean.
  • Correlation – A statistical measure of how two securities move in relation to each other.
  • Maximum Drawdown – The greatest percent decline from a previous high.

Direxion Indexed Commodity & Income Strategy Fund Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risk associated with concentration risk which results from the Fund’s investments in a particular industry or sector and can increase volatility over time. Investing in a fund that invests in specific industries or geographic regions may be more volatile than investing in a broadly diversified fund.  Active and frequent trading associated with a regular rebalance of the Fund can cause the price to fluctuate, therefore impacting its performance compared to other investment vehicles. Commodities are subject to significant volatility and entail a high degree of risk. Leverage by the Fund can accelerate the velocity of potential losses. Risks of the Fund include Derivatives Risk, Commodity-Linked Derivatives Risk, Futures Strategy Risk, Counterparty Risk, Subsidiary Investment Risk, Interest Rate Risk, Other Investment Companies (Including ETFs) Risk, and Index Correlation/Tracking Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Direxion Auspice Broad Commodity Strategy ETF Risks – The Fund is an actively managed ETF that does not seek to replicate the performance of a specified index and is not required to invest in the specific components of its benchmark index. Investing in the Fund may be more volatile than investing in broadly diversified funds. The Fund is not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and intend to actively monitor and manage their investment. An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with concentration that results from the Fund’s investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts, forward contracts, options and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include risks specific to a Futures Strategy, Leverage Risk, Counterparty Risk, Cash Transaction Risk, Other Investment Companies (including ETFs) Risk, Subsidiary Investment Risk, and risks related to investment in commodities. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Exchange-traded commodity futures contracts generally are volatile and are not suitable for all investors. The value of a commodity-linked derivative investment typically is based upon the price movements of a physical commodity and may be affected by changes in overall market movements, volatility of the index, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and regulatory developments. Commodity-linked derivatives also may be subject to credit and interest rate risks that in general affect the value of debt securities. The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in securities or other investments.

Risks associated with the use of futures contracts are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the futures contract; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient cash, it may have to sell securities or financial instruments from its portfolio to meet daily variation margin requirements, which may lead to the Fund selling securities or financial instruments at a time when it may be disadvantageous to do so.