iShares Plans New Commodities ETF

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iShares, the world’s largest purveyor of ETFs, plans to market a futures-based commodities ETF designed to minimize contango and maximize backwardation—a follow-on to a first-generation fund it launched about five years ago that doesn’t target contango. The fund’s 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. iShares’ filing with the Securities and Exchange Commission didn’t disclose tickers or fees.

iShares’ 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 opposite—when the soonest-to-expire contract is the priciest, which creates a tail wind for a fund manager who maintains exposure by rolling into one that’s cheaper than the one that’s expiring.

The iShares fund will own long positions in “commodity excess return futures” 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.

iShares’ 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 “DJ-UBS Roll Select CI”—before payment of the trust’s 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:

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Four of the above commodities—cocoa, lead, platinum and tin—are eligible but aren’t 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.