BGI's New ETNs Track Commodity Indexes

The ETNs, part of the firm's iPath line, started trading yesterday. The expense ratio for the ETNs is 75 basis points.

In addition to energy and metals such as copper and nickel, the new ETNs include livestock, industrial metals, grains and natural gas.

Cutting Tracking Error

The firm went with an ETN structure in order to reduce tracking error, says Philippe El-Asmar, managing director at Barclays Global Investors.

Unlike ETFs, ETNs are debt instruments. In an ETF, an investor owns a share of an equity index. When the share is redeemed, it's replaced with the underlying securities.

An ETN tracks an index but is treated as a bond instrument in which an issuer -- Barclays in this case -- owes the shareholder the value of the share at the time.

El-Asmar says ETNs have credit risk as opposed to equity risk, since there's the possibility the issuer won't be able to pay its debt.

But the tracking error, which is the difference between the price of the security and the index, is almost zero. With ETFs, the stocks chosen to make it up can sometimes deviate from the benchmark index.

El-Asmar says clients had been calling the firm asking for exposure to more specific commodities for some time.

If the ETNs reach a trading volume of 50,000 to 100,000 shares per day, that would be "reasonable," he said.

Barclays has other commodity offerings as well. Last year the firm started an oil ETN, iPath S&P GSCI Crude Oil Total Return Index (NYSE: - ).

The firm also offers three other commodity ETNs, three currencies, one tracking India and one that tracks covered calls.

Commodities Look Good

Commodities are probably going to keep rising, says Jay Feuerstein, chief investment officer at 2100 Xenon, a Chicago investment company whose parent is Old Mutual.

Feuerstein says rising demand from developing countries will drive prices. In inflation-adjusted terms, he says, the price of gold is still below its peak in the early 1980s. Gold reached more than $1,600 per ounce at that time, when adjusted for inflation.

The current gold price is about $764 per ounce, so there is room to grow, he says.

A similar situation exists with other commodities. Grain prices have gone up about 70% in the past 12 months, and even coffee, a relative underperformer, is showing gains in the 30% range.

Commodities have outperformed real estate, Feuerstein says, despite the latter's popularity as a safe haven.