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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