USCF Debuts United States Metals Index Fund (USMI) - ETF News And Commentary
June 19 2012 - 11:13AM
Zacks
United States Commodity Funds, an ETF issuer specializing in
funds that target natural resource futures contracts, has debuted
another product, this time targeting the broad metals space. This
launch comes just two months after the company put out a similar
product in the agricultural market space, USAG, and it looks to
give similar exposure to the metal segment as well.
The new fund trades under the symbol USMI and
is called the United States Metals Index Fund. The
product takes 10 eligible metal futures contracts and, on a monthly
basis, chooses which of these commodities to purchase and in what
month of expiration.
Currently, the ETF can choose from ten metals including both
precious metals and industrial ones. In total, the product can
invest in the following; aluminum, copper, nickel, zinc, lead, tin,
platinum, silver, palladium, and gold (see Top Commodity ETFs In
This Uncertain Market).
In terms of current exposure, the index has heavy base
weightings in gold, silver, copper and aluminum, while it is light
on tin, lead, platinum, and palladium. The product then
collateralizes the investment with cash, cash equivalents, and US
government obligations that have less than two years to
maturity.
USMI is structured as an ETF and looks to charge investors 70
basis points a year in fees. However, investors should note that
the fund is structured as a commodities pool, or limited
partnership, and thus investors may face some tax issues such as
K-1s although it is best to talk to your tax professional about
these issues (see Hard Times In Soft Commodity ETFs).
Additionally, investors should also be aware of the index
provider, SummerHaven, and their approach to commodities investing.
The organization believes that commodities with low inventory
levels outperform those with high ones, while it also claims that
price-based measures, like futures basis and momentum, can assist
in figuring out the current inventory levels.
With this strategy, the company then embarks on a multistep
process in order to determine the weightings for commodities in a
particular month. First, the three metals with the greatest levels
of backwardation—measured by annualized price difference between
the futures price for the next-to-expire contract and the following
contract—are selected (also read USCF Launches Agricultural
Commodity ETF).
After that the two commodities from the remaining seven that
have the greatest price momentum over the past twelve months are
included as well. These two commodities, along with the three from
the backwardation part of the equation, are then giving 3% boosts
from their base weights while the remaining five metals see a three
percent reduction in their weighting.
Following this process to determine the weightings, the company
then selects the contracts in the month that has the greatest level
of backwardation or the least amount of contango for inclusion.
Will it be a success?
Clearly, the method that SummerHaven and USCF take to construct
their commodity products is much more involved and in-depth than a
host of other providers. However, this had led to mixed success for
the firm as USCI has taken off in terms of total assets while USAG,
while still pretty new, has not seen anywhere near the same level
of interest (read Is USCI The Best Commodity ETF?).
Another factor to consider is that the broad metals ETF space is
quite sparse overall as well. Currently there is only one other
product that even trades in this market with exposure to both
industrial and precious metals, the Rogers International
Commodity Index Metals ETN (RJZ).
This note has seen some interest, close to $40 million in AUM,
but it has been around for almost five years now and still sees
volume below 25,000 shares a day. Given this lukewarm response and
lack of other products in the space, it is difficult to say if the
market is just an unpopular segment, or if investors are just
shying away from RJZ instead (see more in the Zacks ETF
Center).
Either way, investors will soon find out the answer to this
question as USMI begins accumulating assets. The product is cheaper
than RJZ but whether investors are ready for the SummerHaven
methodology in commodity sector ETFs is still uncertain, suggesting
that investors should keep their eye on this fund if they are
potentially looking for a new way to play the broad metals market
in ETF form.
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