iShares Contango-Killing ETF Live Friday

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iShares, the world’s largest purveyor of ETFs, on Friday is launching a futures-based commodities ETF designed to minimize contango and maximize backwardation—a follow-on to “GSG,” a first-generation fund it launched about five years ago that doesn’t target contango. The new fund’s benchmark currently includes 20 commodities.

The iShares Dow Jones-UBS Roll Select Commodity Index Trust ETF (NYSEArca:CMDT) will be based on the contango-killing Dow Jones-UBS Roll Select Commodity Index Total Return. iShares’  latest filing with the Securities and Exchange Commission detailing the fund said the fund has a sponsor’s fee of 0.75 percent, or $75 for each $10,000 invested.

CMDT, which first went into registration in December 2011 , is the latest in a growing field of contango-targeting broad-based commodities funds that includes the $6.29 billion PowerShares DB Commodity Index Tracking Fund (DBC) and the $495 million United States Commodity Index Fund (USCI). USCI has an annual management fee of 1.03 percent, while DBC’s is 0.93 percent, or $93 for each $10,000 invested.

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—it’s 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 exchange-traded futures contracts 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 (GSG) came to market in July 2006. It has $1.13 billion in assets, according to data compiled by IndexUniverse. GSG has an annual management fee of 75 basis points, or $75 for each $75 invested.

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 commodities currently eligible for inclusion in the DJ-UBS CI are:

Aluminum

 

Heating Oil

 

Soybeans

Cocoa

 

Lead

 

Soybean Meal

Coffee

 

Lean Hogs

 

Soybean Oil

Copper

 

Live Cattle

 

Sugar

Corn

 

Natural Gas

 

Tin

Cotton

 

Nickel

 

RBOB Gasoline

Crude Oil

 

Platinum

 

Wheat

Gold

 

Silver

 

Zinc

Four of the above commodities—platinum, lead, tin and cocoa—are eligible but aren’t currently represented in the DJ-UBS CI, the latest prospectus said.

The DJ-UBS CI will be reweighted and rebalanced annually, on a price-percentage basis, to reflect changes in trading volume and production figures. The prospectus said the selection and weighting of the DJ-UBS CI’s constituents and its index methodology is intended to reflect the following four main principles:

  • Economic significance
  • Diversification
  • Continuity
  • Liquidity

 

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