FTGC ETF: I Prefer DBC For Commodity Exposure

Nerthuz Global Tactical Commodity Strategy Fund (NASDAQ :FTGC) is an ETF actively managed that gives investors exposure to a wide range of commodities. The fund has performed well over the last few years but it has not outperformed passive index funds like the Invesco DB Commodity Index Tracking Fund. This is because the manager decided to underweight energy to reduce volatility. In the future, I anticipate the global energy crisis will continue, which would favor energy commodities over the next few years.
.

For commodity exposure, I prefer to use the passive DBC ETF. Fund Overview: The First Trust Global Tactical Commodity Strategy Fund, an ETF actively managed by First Trust Global Tactical Commodity Strategy Fund, provides investors with exposures to a wide range of commodities. Investors love the fund, which has $3.3 billion net assets.
.

FTGC charges a 0.95% fee, which is higher than peer funds (Figure 1). Figure 1 - FTGC (Seeking Alpha Strategy) and peer funds (Seeking Beta) Strategy. Unlike index-based commodity ETFs that track the price of commodities, the FTGC fund's portfolio is actively managed by a team at First Trust. Fund managers choose between 10 and 35 commodities based on liquidity and realized volatility. This allows them to build a portfolio that maximizes returns and targets a particular level of volatility.
.

Portfolio Holdings At the moment, the fund holds the futures position illustrated in Figure 2. Figure 2 - FTGC futures positions (ftportfolios.com). Figure 2 shows the commodity exposure according to asset class. Currently, 40% of the FTGC ETF is invested in agricultural commodities, 21% energy commodities, 12% industrial metals and 6% precious metals.
.

Figure 3 - FTGC allocation by asset type (Author created using data from FTGC website). Returns Because of supply/demand imbalances, the last few years have been a great time to invest in commodities. The FTGC ETF returned 17.1% YTD from November 30, 2022. The fund's annual total return has been 16.9% and 7.7%, respectively (Figure 4).
.

Figure 4 - FTGC Returns (ftportfolios.com). Distribution & Yield. The trailing 12-month distribution for the FTGC ETF was $2.54/share, which represents a 10.6% current yield. FTGC's distribution depends on its performance. Therefore, if commodities perform poorly, like 2020, the fund will not pay a distribution (Figure 5) Figure 5 - FTGC historical Distribution (Seeking Alpha). FTGC Vs
.

DBC I decided to compare the FTGC ETF and the DBC ETF in order to investigate the claim of the fund that actively managed portfolios maximize returns vs. a vanilla index fund. The following chart shows DBC's historical returns up to November 30, 2022
.

Comparing DBC and FTGC, it is clear that the DBC ETF outperformed FTGC in all time periods. Figure 6 - DBC returns (invesco.com). Portfolio Visualizer allows us to compare the funds more closely. FTGC has a 0.1% CAGR (from November 2013) to November 2022, whereas DBC has 0.2% (Figure 7). Figure 7 - FTGC vs
.

DBC (Author created with Portfolio Visualizer). FTGC has shown lower volatility. StDev of monthly return of 13.6% vs 17.9% for DBC. DBC is ahead in Sharpe Ratio at 0.06 vs. DBC.
.

0.02 for FTGC. DBC performed worse than expected from 2014 to 2016 (Figure 8). However, DBC performed better in 2016 (Figure 8). Figure 8 - FTGC vs DBC
.

DBC annual returns (Author created with Portfolio Visualizer) DBC overweights Energy. The DBC ETF tracks DBIQ Optimum yield Diversified Commodity Indices, which have the following base weights (reset each November). Figure 9. Figure 9 - DBIQ Optimum yield Diversified Commodity Index baseweights (DBC Prospectus). As you can see, DBC's index has a 55% weight in energy commodities and 10.5% in precious metals. It also has 12.5% in industrial metals and 22.5% in agricultural commodities. The FTGC ETF's commodityweights, on the other hand, are determined by the fund manager based on maximising returns vs.
.

Currently, FTGC has a 21% energy commodity weight compared to DBC which has a 50.6%.
.

I believe FTGC is energy underweight and this has been the reason it has outperformed passive DBC ETF over the past few years. FTGC's energy underweight is likely because energy commodities have shown higher realized volatility than other commodities. Crude oil futures briefly fell into negative territory during the COVID pandemic in 2020, but then rocketed to $130 in 2022). Volatility can be both positive and negative. However, in the last few years, energy volatility has been on its side due to geopolitical risks.
.

DBC Should Outperform in the Short- and Medium-Term Due to the ongoing global energy crisis created by Russia's invasion Ukraine (sanctions against Russian energy commodities; disruptions of Russian natural gas exports from Europe, etc.). DBC is more likely to outperform FTGC in the coming years because I believe energy commodities will continue to outperform over the next few year. If the world can successfully transition to a low carbon energy system, such as through electrification or increased use of low-carbon resources like nuclear, DBC could underperform. DBC has a base weight of 55% in energy commodities, whereas FTGC's manager might choose to invest in less energy commodities or not at all. Conclusion: The FTGC fund, an ETF actively managed by investors, provides exposure to a wide range of commodities.
.

To maximize returns and maintain a level of volatility, the manager selected commodity exposure. The manager decided to underweight energy due to its higher realized volatility. This has resulted in poor performance over the past few years. In the future, I anticipate that the global energy crisis will continue for several more years. This favors energy commodities.
.

For commodity exposure, I recommend the passive DBC ETF.