Blackrock merges gas fund with commodity index

Blackrock is merging its Natural Gas Commodity Index Fund (GAS) with its Broad Commodity Index Fund (CBR).

It’s also changing the investment objective of CBR to track the Morningstar Global Long/Flat Commodity Index. Unitholders have approved the merger and change in investment objective, which was announced Nov. 23rd.

The company believes the merger will benefit unitholders, as they’ll have a larger combined portfolio potentially allowing for improved index tracking and trading liquidity.

GAS assets have decreased to a level whereby it was no longer commercially viable for BlackRock to maintain, and it would have otherwise been terminated.

The move is positive within a portfolio context, but the departing fund’s investors may still want alternatives, say National Bank analysts Pat Chiefalo, Daniel Strauss and Ling Zhang.

They support commodity allocation for diversification purposes, given the sector’s long history of low correlation to equity and bond exposures. They also view the move as “positive for CBR unitholders since it increases the size of the fund potentially leading to better tracking.”

For investors looking to achieve specific Natural Gas exposure via an ETF, however, they say the change will dilute their desired end exposure to 7% within CBR.

In addition, they say natural gas exposure has traditionally been a challenging investment, with returns seemingly perpetually negative since 2008. The impact of declining spot prices over the years has taken its toll on exposure typically achieved by rolling front month futures contracts.

Nevertheless, natural gas exposure through ETFs still commands over $1 billion in assets, they argue, which indicates investors remain committed. They consider continued exposure to the market is key for the following reasons:

• Guidance from producers such as Chesapeake Energy Corp. suggests gas production will be down 7% next year

• Forecasts are calling for a colder winter this year after last year’s mild winter

• North American electric utilities continue to retire coal units as the result of an aging coal fleet and environmental concerns. These will be replaced by cleaner-burning natural gas facilities

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.