Third Quarter 2020 Commodity Commentary
The third quarter of 2020 was a strong one for commodities in general, as most notable commodity benchmarks were up ranging anywhere from roughly +4%-to + 9%. The indices that were energy focused, lagged in comparison to its more diversified peers.
The Direxion Auspice Broad Commodity Strategy (symbol COM) performed well relative to its peer group, finishing +7.5% for the quarter. In addition, the outperformance of COM YTD relative to competitors continued to manifest itself as of the end of Q3, with COM down -2.5%* YTD (9/30/2020), while the notable commodity benchmark peers are down anywhere from 12-30% YTD. For the most recent month-end and standardized performance click here.
The “risk on” environment pervaded throughout the quarter as it was also a strong one for U.S. equities. The optimism around the timing of a therapeutic and/or vaccine, along with continued mantra for more fiscal stimulus kept the commodity markets in a mostly upward trajectory. This was evident by the strategy increasing the number of commodities it was long throughout the quarter, by going from only one as of the end of June, to eleven out of the possible twelve by quarter end.
One of the strongest gains for the quarter was in the metal sector, particularly in the industrial metals (silver and copper), as the reopening trade continued to gain momentum. An encouraging sign was the strength that copper showed throughout the quarter, as that tends to be a leading indicator for the health of emerging markets, and specifically China. In the case of silver, its industrial usage allowed it to continue to play catch up to gold, as silver’s prices were coming off historically low levels relative to gold within the early part of this year.
In the agricultural markets, it was an encouraging sign to see grains start to breakout of their long-term downtrend, as weather related impacts (dry and warm) could curtail production in places like the U.S. Midwest, Europe, and Argentina. This gave grains a boost, most notably the wheat markets.
Specifically the biggest individual commodity gains for COM during the quarter were in gold, silver, copper, wheat, and soybeans.
As we enter the fourth quarter, the political environment will take center stage and the ramifications of the U.S. election could lead to a number of scenarios playing out. This could include the potential of interest rates rising, yield spreads widening, and geopolitical factors (such as a global push for additional stimulus) taking place which could lead to some level of inflation. Historically, inflation has tended to be a favorable environment for commodities.
Lastly, we are pleased that the COM ETF continues to be ranked as a 5-star fund by Morningstar within the Broad Commodity category, while being categorized with the lowest risk level. Out of 101 funds based on risk-adjusted returns as of 9/30/2020†.
* The Fund’s adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Services Agreement with the Fund. Under this Operating Services Agreement, Rafferty has contractually agreed to pay all expenses of the Fund as long as it is the advisor of the Fund other than the following: management fees, Rule 12b-1 distribution and/or service fees, taxes, swap financing and related costs, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization, acquired fund fees and expenses, and extraordinary expenses. If these expenses were included, the expense ratio would be higher.
For the most recent month-end and standardized performance click here.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized.
Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.
† Out of 101 US Fund Commodities Broad Basket funds based on risk adjusted returns as of 9/30/2020. ©2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar RatingTM for funds, or “star rating”, is calculated for managed with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. The Direxion Auspice Broad Commodity Strategy ETF (COM) was rated against the following numbers of US Fund Commodities Broad Basket funds: 101 funds in the last three years. As of 9/30/2020, the fund received a 5-Star rating for the 3-year period and overall. Past performance is no guarantee of future results.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-301-9214 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Market Disruptions Resulting from COVID-19. The outbreak of COVID-19 has negatively affected the worldwide economy, individual countries, individual companies and the market in general. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund.
CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.
Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.
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.
Direxion Shares Risks – 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 Fund’s use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include risks related to investment in commodity-linked derivatives and commodities, Futures Strategy Risk, Leverage Risk, Market Risk, Market Disruption Risk, Counterparty Risk, Cash Transaction Risk, Subsidiary Investment Risk, Interest Rate Risk, and Tax Risk. 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.