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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