A New ETF To Play Commodities

In a time when markets have enhanced uncertainty and some are turning to commodities to increase returns, United States Commodity Funds LLC unleashed its newest weapon, the US Commodity Index Fund (USCI).

United States Commodity Fund LLC is no stranger to the ETF landscape, as that it is the provider of the well known US Oil Fund (USO) and US Natural Gas Fund (UNG), two common ways to play the energy market.  The company’s new fund tracks the SummerHaven Dynamic Commodity Index, which is an active index that holds futures positions in energy, metals and agricultural products. 

To be more specific, USCI tracks 14 different commodities and are weighted equally in the portfolio. The index is rebalanced every month, and as of the date of its launch, it held positions in soybeans, sugar, cotton, lean hogs, platinum, silver, soybean meal, WTI crude oil, tin, gold, coffee, copper, nickel and natural gas.

What differentiates USCI from USO or UNG is that it is a diversified play on commodities and tries to mitigate the effects on contango and backwardation.  Contango is a market condition in which futures contracts with expiration dates further out cost more than those contracts that expire at an earlier time.  The opposite condition is known as backwardation, when contracts with nearer expiration dates cost more. 

Currently the crude oil markets are in a state of contango, where futures contracts with higher further out prices must be rolled over every month in order to maintain a market position.  On the other side of the pendulum, the tin markets appear to be in backwardation where current prices of tin appear to be higher than futures prices, where rolling the contract into the next month would produce a net gain for a long position in tin.  By having long positions in both oil and tin, the effects of increased costs of holding long position in an oil market in contango are slightly mitigated by the increased gain from a long position in the tin markets and the overall volatility in commodities markets is leveled out.

Although it appears that USCI smoothes out volatility in the commodities market, it is important to use caution when investing in such a vehicle.

Disclosure: No Positions

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