Elkhorn Investments is pitching among US investors its Elkhorn Commodity Rotation Strategy ETF (DWAC), the first commodity exchange-traded fund (ETF) based on the proprietary relative strength methodology developed by Dorsey, Wright & Associates (DWA), a Nasdaq Company.
"This is not only the first Dorsey, Wright & Associates-based commodity ETF, but also the first purely tactical commodity ETF in the marketplace," said Ben Fulton (pictured), founder and chief executive of Elkhorn. "Investors looking for a highly selective portfolio of commodities now have a solution."
The Elkhorn Commodity Rotation Strategy ETF's commodity exposure is based on a model developed by DWA using their proprietary relative strength methodology which evaluates a universe of 21 commodities and provides equal-weighted exposure to the five commodities exhibiting the highest relative strength, according to Fulton. The ETF also features an 'intelligent roll strategy' to mitigate the potential negative impact of contango, and invests in a short duration portfolio of highly liquid, high quality bonds.
"We expect this ETF will resonate with investors because it is the first of its kind in the commodity space in the US," said Fulton. "It's a long-only strategy but it provides exposure to commodities in a very dynamic and tactical way."
According to Fulton, this kind of product can be used as a complement to equity investments by investors seeking alternatives to US large cap equities after quite a long bull run. "We have been now in a five/six year bear market on some commodities and with a higher probability of an interest rate hike this kind of products could help to hedge that risk," said Fulton. "We think commodity investing will provide value during the next few years."
The product is an ETF as opposed to a structured note "because it is the preferred wrapper in the US for its simplicity and transparency", said Fulton. "Investors are comfortable owning the commodity futures contracts and this particular ETF also provides efficiency around tax considerations as investors will receive a 1099 tax form as opposed to the K-1 forms often associated with commodity ETFs," he said. "K-1's tend to be problematic for end investors, as they can cause a substantial amount of confusion, and may require additional filing of forms at tax time. Most investors prefer the 1099 format over the K-1 structure for these reasons."
Because of the current interest rates environment this kind of strategy works better on an ETF than on a structured note, according to Fabrice Hugon, senior managing director of structured products at Elkhorn. "However, because we have the underlying ETF we could consider a risk control type of structure," said Hugon. "In any case, you would have to go quite low on volatility control to make it palatable and we don't think commodities with vol control at 5% would make much sense. Once the interest rate environment changes there will be more chances to issue notes."
The focus at the moment at Elkhorn is on ETFs because "it's a more relevant wrapper for US investors", said Hugon. "[Certificates of deposit] CDs and notes are more niche kind of products but we will continue building our offering to provide different alternatives to investors," he said. "We want to be wrapper-agnostic. CDs and structured notes will play an important role in our tool box. Our philosophy is to provide strategies that make sense and add value. We don't want to bring to market products that don't have a chance to perform."
The upcoming launch of the firm's structured unit investment trust (SUIT) range which has been developed in partnership with Vest Financial Group, remains on track and awaiting the green light from the US Securities & Exchange Commission (SEC), according to Hugon. "We are getting closer to the finish line in relation to the launch of our structured UIT range," said Hugon. "We believe that being able to offer a structured products as a Trust with a full prospectus and the ability to trade daily at NAV, makes this vehicle a very interesting proposition to deliver investment strategies in the US market. We believe this will add value to our offering because it will also be a very efficient way to deliver structured products via a more robust wrapper."
Elkhorn is also marketing the Elkhorn Fundamental Commodity Strategy ETF (RCOM), another actively-managed, commodity-based ETF addition to the firm's ETF lineup, which includes the recently launched investment grade only Elkhorn S&P High Quality Preferred ETF (EPRF).
"The Elkhorn Fundamental Commodity Strategy ETF (RCOM) is a smart beta type of strategy providing exposure to a broad basket of commodities which can be used as a core holding," said Fulton. "The initial seed came from a large US institution fund because it aligns well with the endowments and wealth management type of mandates."
Elkhorn and DWA have developed numerous products with Tom Dorsey, DWA's founder and chief executive joining as a strategic stakeholder of Elkhorn in August 2015 to continue to grow the relationship between the two firms. There are 23 live products in the US database linked to DWA underlyings. Two of those are in the registered note wrapper, while the rest are certificates of deposit.
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