New Metals ETF Debuts

Seeking Alpha

By Michael Johnston:

United States Commodity Funds announced this week the debut of an ETF that offers exposure to a basket of metals futures contracts, giving investors seeking exposure to this corner of the commodities market a new tool at their disposal. The United States Metals Index Fund (USMI - News) will seek to replicate the SummerHaven Dynamic Metals Index Total Return, a benchmark that shifts exposure between various contracts based on market conditions.

USMI will be unique in that it will offer exposure to both industrial and precious metals. While there are a number of products in both the Metals and Precious Metals ETFdb Categories, there are few existing exchange-traded products that combine these asset classes. Specifically, the underlying index will include six base metals and four precious metals:

  • Aluminum
  • Copper
  • Zinc
  • Nickel
  • Tin
  • Lead
  • Gold
  • Silver
  • Platinum
  • Palladium

Each metal will be assigned a “base weight” based on liquidity and overall market importance. From there, adjustments will be made based on prevailing market conditions, through a process effectively designed to shift toward commodities that are assessed to be in a low inventory state and away from those assessed to be in a high inventory state.

Specifically, the process for determining which metals to overweight will be as follows:

  • Three metals with the highest annualized price difference between closest-to-expiration and second closest-to-expiration (i.e., most significant backwardation or least significant contango) are selected
  • From remaining seven, the two metals with highest percentage price change (i.e., momentum) over the previous 12 months are selected

The five selected metals will have their weights increased 3% from their base weights, while the weights of the other five will be reduced by 3% each. That process, which is completed monthly, should have the effect of tilting exposure toward commodities in a state of contango or with strong momentum, and away from those with poor performances over the last year and/or steep contango.

At the end of 2012, the underlying index allocated about 57% to industrial metals and 43% to precious metals.

USMI will charge a management fee of 0.70%. This product is structured as a commodity pool, meaning that gains will be taxed at a blended capital gains rate of about 23%. Investors should also note that USMI will deliver a K-1 at the end of the year.

SummerHaven ETFs

USMI is the latest in a growing lineup of ETFs from USCF linked to indexes maintained by SummerHaven. Though the specifics of these benchmarks vary, the underlying thesis is similar: tilt exposure toward commodities deemed to be in a state of low inventory. Other USCF ETFs include:

  • United States Commodity Index Fund (USCI)
  • United States Agriculture Index Fund (USAG)
  • United States Copper Index Fund (CPER)

Disclosure: No positions at time of writing.

Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.

Original post

View Comments (0)