A new commodity exchange traded fund (
) from SummerHaven and U.S. Commodity Funds finally seems to solve
an age-old problem with diversified commodity ETFs.
U.S. Commodity Index Fund (NYSEArca: USCI)
chooses from a basket of 27 eligible commodities, but only 14 are
held at any given time. Most existing broad commodity ETFs hold
baskets of all those commodities at once, treating them as one
single asset class. Many feel that taking a passive approach to
commodity investing doesn't necessarily work.
SummerHaven partners Kurt Nelson and Yale Finance Professor and
commodities expert K. Geert Rouwenhorst developed the
SummerHaven Dynamic Commodity Index (SDCI)
out of this belief. [
How Not to Get Burned By Commodity ETFs.
Each month, the index looks at the universe of commodities and
makes its selections for what will be included that month based on
price information and what's lowest in inventory. Their methodology
removes the markets that are in contango, and to further mitigate
the effect, futures contracts in the fund range anywhere from three
months to 12 months out. [
Why Oil ETFs Are Rising.
"We invest out along the curve and we spread our bets evenly,"
says Rouwenhorst. This has the effect of diversifying the fund so
that it doesn't concentrate on any one particular commodity.
Rouwenhorst and Nelson note that this is the first time a ETF has
taken the leap into actively managing a basket of commodities.
Rouwenhorst believes in the revolutionary role commodity ETFs
have played for retail investors, noting that they've helped in a
couple big ways:
- Now investors can trade commodities like they trade any other
stock, but at the ETF level. There are no margin requirements to
- Many ETFs have offered diversified commodities exposure.
Doing this on your own would be very expensive and difficult to
replicate. "For a small investor to maintain positions in hogs,
oil, corn and wheat all at the same time, making sure that the
contracts would not mature…it was a big headache," Rouwenhorst
Nelson points out that commodity investing is still a relatively
young business, but that many past products have not been designed
with the investor in mind. That's something they're hoping to fix
with this new product. "What we've taken an effort to do is to
construct an index from the ground up on the principles we're
familiar with to develop an active index for investors," says
Each commodity's representation in the index is capped at
roughly 7% at the start of each month. The index rules also require
that at least one commodity from each of the six commodity sectors:
, industrial metals,
, livestock, softs and grains.
You can view what's currently in the index and a complete list
of commodities eligible for inclusion on
10 New ETFs Worth a Look.
USCI's expense ratio is 0.95%.