iShares, the worldâs largest purveyor of ETFs, plans to market a futures-based commodities ETF designed to minimize contango and maximize backwardationâa follow-on to a first-generation fund it launched about five years ago that doesnât target contango. The fundâs benchmark currently includes 19 commodities.
The proposed iShares Dow Jones-UBS Roll Select Commodity Index ETF will be based on the contango-killing Dow Jones-UBS Roll Select Commodity Index Total Return. iSharesâ filing with the Securities and Exchange Commission didnât disclose tickers or fees.
iSharesâ planned ETF is the latest in a growing field of contango-targeting broad-based commodities funds that includes the $5.6 billion PowerShares DB Commodity Tracking Index Fund (NYSEArca:DBC) and the $424 million United States Commodity Index Fund (NYSEArca:USCI).
Contango occurs when near-term contracts are cheaper than those expiring later on, which cuts into returns when fund managers roll exposure when a contract expires.
Backwardation is the oppositeâwhen the soonest-to-expire contract is the priciest, which creates a tail wind for a fund manager who maintains exposure by rolling into one thatâs cheaper than the one thatâs expiring.
The iShares fund will own long positions in âcommodity excess return futuresâ contracts, called CERFs, on the Dow Jones UBS Roll Select Commodity Index, together with cash and short-term securities used to collateralize the long position, the company said in the filing.
iSharesâ first broad, futures-based commodities ETF, the iShares GSCI Commodity-Indexed Trust (NYSEArca:GSG) came to market in July 2006. It has $1.32 billion in assets.
Commodities In The Fund
The prospectus said the index represents the return on a fully collateralized investment in the âDJ-UBS Roll Select CIââbefore payment of the trustâs expenses and liabilities.
The DJ-UBS CI is a benchmark index composed of futures contracts on physical commodities, the selection and weighting of which are currently determined based on the five-year average of the trading volume, adjusted by the historic dollar value of the futures contract being considered for inclusion in the index.
The benchmark also considers the five-year average of production figures, adjusted by the historic dollar value of the related futures contracts, for the underlying commodities. The 23 commodities currently eligible for inclusion in the DJ-UBS CI are:
Four of the above commoditiesâcocoa, lead, platinum and tinâare eligible but arenât currently represented in the DJ-UBS CI, the prospectus said.
The iShares filing comes just days after Paris-based bank BNP Paribas filed similar paperwork to market its own version of an optimized rolling commodities futures ETF.
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