CIBC’s $6.27 million of Mitts on Bloomberg Commodity index designed for conservative mandates

By Emma Trincal

New York, Aug. 24 – Canadian Imperial Bank of Commerce’s $6.27 million of 0% capped Market Index Target-Term Securities due Aug. 28, 2026 tied to the Bloomberg Commodity index may be aimed at institutional investors mandated to invest in commodities but in the most conservative way, advisers said.

The payout at maturity will be par of $10 plus any index gain, subject to a maximum return of par plus 25%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls, the payout will be par.

Diversification, protection

“If you want to allocate to commodities as a way of diversifying your portfolio and get full downside protection, that’s the way to go,” said Scott Cramer, president of Cramer & Rauchegger.

“As you’re doing the construction of your portfolio, you add the commodity allocation using a well-diversified index. You get a broad exposure to a lot of different commodities.”

The Bloomberg Commodity index is composed of 23 components on 21 index commodities. It reflects the return of underlying commodity futures.

The top sector weights of the index are energy and precious metals with 31% and 21% weightings, respectively.

Commodities index exposure involves some risks specific to the roll of the underlying futures contracts, according to the prospectus. The cost or gain generated from rolling expiring futures contracts varies from one commodity to another.

Bullish on oil

Cramer said he may not seek exposure to the commodities space as a whole.

“I’m not necessarily bullish on commodities. It depends on the commodity,” he said.

“I am bullish on oil for instance. I think oil is going to do very, very well.”

Crude Oil WTI jumped more than 25% from a low on June 12 at $67.12 to a recent high on Aug. 9 at $84.40. On Thursday, the price closed at $78.89.

“25% is a low cap for a three-year note. You can get 4.7% on a three-year Treasury. The note gives you a premium of 11% for the risk,” he said.

It remained to be seen if investors in the notes were sufficiently compensated.

“The Treasury return is guaranteed while here, you need the index to go up in order to hit that cap.”

Institutional mandate

Jeff Pietsch, founder of Capital Advisors 360, was not enthusiastic about the underlying exposure.

“Commodities haven’t been a great investment since 2008 with the exception of the pandemic period,” he said.

The index more than doubled between the low of March 2020 and May 2022.

Since a peak in July 2008 at 238, the Bloomberg Commodity index has lost 56%, closing at 104.89 on Thursday.

“I can see this note as an institutional trade for those who have a mandate to hedge inflation. The obvious advantage is the principal protection,” he said.

Unpredictable returns

The three-year lock-up was a concern.

“It’s a random game as you’re trying to time a positive return in a three-year window, where you may or may not be lucky on the outcome.

“This index is just such a sideways-trading underlying. To be tied to a fixed period of three years could make your exit more difficult if the index is down. You’re going to be stuck for three years in a very volatile asset class,” he said.

Pietsch said he would not be interested in the note mainly because of the underlying more than the structure.

He did not object to the 25% cap for instance.

“I’m not giving up that much given the track record of the index,” he said.

The index over the past three years has returned 18%.

“If you have to hold commodities as a mandate to hedge inflation and if you need to eliminate the downside risk, this is the right note. That’s what it’s for,” he said.

Index, sub-indices

But Pietsch would not consider the notes.

“Commodities have been very unpredictable and disconnected from inflation.

“You have to have a strong reasoning as to why you want to be exposed to this underlying,” he said.

The breadth of the index, which is designed to diversify exposure across different commodities, made the allocation decision even more challenging.

“You have to examine all the different sub-indices. Maybe base will be down, and oil will be up. It’s very difficult to evaluate your probabilities of return as well as your risk.”

A drag on the portfolio

Commodities investing was unattractive, a financial adviser said.

“Since you’re not getting any leverage, you’re betting that this thing can grow. Oil is a big piece of it and oil is just crazy volatile. For the rest, what do I know about wheat, coffee or soybeans?” this adviser said.

Commodities have lost money for too long, he added.

“You hold it for three years. It’s just a drag,” he said.

The best performing year in the past decade was 2021 when the index returned over 31%.

But the annualized performance over the past five years is only 6.5%. In the past 10 years, the annual return has been flat.

“It’s not a great play. You might as well own bonds,” he said.

BofA Securities, Inc. is the underwriter.

The notes settled on Thursday.

The Cusip number is 13607Y352.

The fee is 2.25%.

© 2015 Prospect News.
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