U.S. Commodity Funds, best known for its $1.89 billion U.S. Oil Fund (NYSEArca:USO) and $2.47 billion U.S. Natural Gas Fund (NYSEArca:UNG), launched a new diversified commodities index ETF that seeks to stem the corrosive effect contango has on returns.
The United States Commodity Index Fund (NYSEArca:USCI) will track the SummerHaven Dynamic Commodity Index (SDCI), an actively oriented commodities futures index that has positions in energy, precious and industrial metals, and agricultural commodities, including livestock, grains and softs.
The fund is based on SummerHaven Index Management's first index and is also U.S. Commodity Funds' first ETF that isn't focused exclusively on energy. It will have an expense ratio of 0.95 percent.
"The fund basically takes the view that if investors want to be long commodities, the research has shown that expected returns are higher if you concentrate the portfolio in the backwardated portion, or at the least-contango portion of the commodities space," SummerHaven Co-Founder and Director of Research Geert Rouwenhorst said in a telephone interview.
Backwardation is a condition in futures markets when contracts with nearer expiration dates are more expensive than those with further-out expiration dates. Contango is the opposite, with futures with further-out expiration dates costing more than those with nearer expiration dates.
Contango can erode fund returns because managers have to pay up when they "roll" positions from expiring contracts to later-month ones to maintain exposure. That situation is reversed when markets are in backwardation, because expiring positions are rolled into contracts that are less expensive than the contracts that are expiring.
Each month, USCI's index SDCI picks 14 commodities from a pool of 27 based on fundamental indicators, weighting the selected commodities equally in the portfolio. The index is rebalanced monthly, which, as the company states, makes the SDCI the first "long-only active benchmark for commodity investors."
The new fund is U.S. Commodity Funds' latest effort to address contango-related problems with its products. For example, to complement its natural gas ETF (NYSEArca:UNG), it rolled out a sister natural gas fund (NYSEArca:UNL) that tracks 12 successive futures contracts instead of UNG's single contract, which makes it particularly vulnerable to contango.
At the end of July, U.S. Commodities Funds had $5.1 billion in assets under management.
Heavy Hitters At SummerHaven
Rouwenhorst, also a professor at Yale University, is best known for a paper co-authored earlier this decade with Gary Gorton, Facts and Fantasies about Commodity Futures, which kicked off the surge of commodity investing seen in the past five years. Gorton acts as a senior adviser to SummerHaven.
In the paper, Gorton and Rouwenhorst showed that an investment in a diversified commodity index over a 50-year period would have seen positive returns that were also negatively correlated to stocks and bonds.
IndexUniverse.com Global Head of Editorial Matt Hougan extolled the potential that an ETF like USCI had in a blog last year when the fund entered registration at the Securities and Exchange Commission.
"If you've studied the literature, you should be very excited about the forthcoming SummerHaven commodity ETF from U.S. Commodity Funds," Hougan wrote in the blog titled I Can't Wait For The New Active Commodity ETF.
While the fund's holdings have the potential to have a fair amount of turnover, such as an actively managed mutual fund, it is still a rules-based index that uses the backwardation/contango screen as the motivation for making changes. It will be rebalanced monthly.
SummerHaven's Director of Marketing and Investor Relations Kurt Nelson said he hopes investors recognize that USCI represents something new in the commodities space, which would give the fund the asset-gathering advantages over competitors that have historically gone to first innovators in the ETF industry.
"Our hope is that people look at us and say:'You're not making a small change, you're actually doing something first.' And we'd get credit for that. We'll find out over the next few weeks and months," Nelson said in the telephone interview.
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