United States Commodity Funds LLC has launched a new ETF, the US Commodity Index Fund (NYSEArca: USCI) with an initial 100,000 units at $50 per unit. The company already offers two of the best known commodity ETFs, United States Oil Fund (NYSE: USO) and United States Natural Gas Fund (NYSE: UNG). USO has net assets of about $1.9 billion and UNG assets total about $2.5 billion.
The company’s new fund tracks the SummerHaven Dynamic Commodity Index, an active commodity futures index with positions in energy, metals and agricultural products. The USCI Fund is intended to attract investors who want to be long commodities, while at the same time escaping the contango effect.
Contango is a commodity market condition in which futures contracts with expiration dates further out cost more than those contracts that expire sooner. The contrary condition, backwardation, occurs when contracts with nearer expiration dates cost more. The oil market, for example, has been in a contango condition for over a year now. Futures contracts with higher further-out prices must be rolled over every month in order for investors to maintain a market position, adding to the cost of remaining long.
In a backwardated market, expiring contracts are rolled into further-out contracts which actually cost less than the expiring contracts. According to research at SummerHaven, returns on long commodities positions are best if the portfolio is either backwardated or in the smallest possible contango condition.
The SummerHaven index which the USCI Fund tracks comprises 14 commodities from a pool of 27 that are weighted equally in the portfolio. The index is rebalanced every month. At its launch on August 10th, the Fund held positions in soybeans, sugar, cotton, lean hogs, platinum, silver, soybean meal, WTI crude oil, tin, gold, coffee, copper, nickel and natural gas.
Looking at the London Metals Exchange tin futures for August 10th gives an idea of what USCI has in mind. The cash price for a metric ton of tin was $20,605, including settlement costs. The cash price 15 months out, in November 2011, is $20,475 per metric ton. That is a backwardated market, where prices now are higher than the futures price. Rolling the contract into the next month would produce a net gain for a long commodity position in this situation.
The USCI Fund carries a fairly high 0.95% expense ratio and the fund is considered a partnership for tax purposes.
By smoothing out some of the volatility in the commodities markets the Fund may close the gap between headline commodity spot prices and ETF returns that are always lower. Still, investing in commodities is not for the faint of heart.
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