September 01, 2006

Countering Contango

The Deutsche Bank Commodities ETF (ticke r: DBC) has adopted a new policy designed to mitigate the impact of "contango" on share holder returns. DBC's new rules-based strategy will allow it to select the most favorable contract when it rolls over its futures contracts each month. If, for instance, the August aluminum contract is cheaper than the July contract, the fund will purchase the August contract.

"The result will tend to maximize the benefits of rolling in backward at-ed markets and minimize the loss f rom rolling in contangoed markets, " Deutsche Bank says in a statement.

DBC Also Lowers Fees ... Again!

For the second time this year, the team behind DBC has slashed the fees it charges investors.

When DBC launched in February, it charged a gaudy 1.9 percent - somewhat of a disappointment to commodities investors. Just one month later, however, the fund slashed fees by 60 basis points, bringing the "all-in" expense ratio (including bro kerage fees, operating expenses, etc.) down to 1.3 percent. Deutsche Bank said at the time that it had essentially overestimated the costs of running the fund.

Now they've done it again, cutting fees a further 43 basis points to bring the "all-in" fee down to just 87 bps. The cuts include a 20 bps reduction in the management fee (from 95 bps to 75 bps), an 8 bps reduction in the estimated brokerage expense, and the assumption of 10 bps in o rganizational/offering fees and 5 bps in administrative fees.

What's wonderful about the fee reduction is that it is happening for all the right reasons: DBC has now attracted more than $600 million in assets, and the fund is passing along the economies of scale to share holders. That's what should happen ... but so rarely does in the world of ETFs.

DB Files For Seven More

In related news, Deutsche Bank has filed with the SEC for the right to launch an additional seven commodities-based ETFs. The new funds will focus on individual "sectors" within the commodities space, including Energ y, Oil, Precious Metals, Gold, Silver, Base Metals and Agriculture. In each case, the funds will gain exposure using futures contracts and will track "optimum yield" indexes from Deutsche Bank, meaning they will have some flexibility in the timing their "rolls" maximize returns.

The Little ETF That Can Beat The Market

First Trust Portfolios launched a new ETF onto the American Stock E xchange (Amex) that puts a new spin on the idea of value investing. The First Trust DB Strategic Va l u e Fund (ticker: FDV) attempts to look beyond the cover story of reported financial metrics and suss out the true, underlying value in the market.

The fund will track something called the Deutsche Bank CROCIUS + Index, which capture s 40 stocks f rom among the 251 largest names in the S&P 500 Index. It chooses stocks with the "lowest positive CROCI Economic Price Earnings Ratio"-which is a fancy way of saying stocks with high operating margins and strong returns on capital.

The methodology uses various assumptions to make reported financial metrics more comparable across sectors and markets. The 40 companies are assigned equal weights in the index.

The result is a "value-based" ETF that reflects firms' underlying pro fitability ... a factor that historically has had a strong tie to performance. Over the past ten years, for instance, the index has delivered returns of 17.94 percent per year, compared to just 9.16 percent for the S&P 500 Value Index.

The fund reminds many of Gotham Capital principal Joel Greenberg's best-selling book, The Little Book That Beats The Marke t . That book also emphasizes the importance of picking stocks that earn more than their cost of capital, and promises backtested returns of over 30 percent per annum.

The ETF charges 65 basis points in annual expenses.

First India ETF Trades

BGI launched the first India fund to trade outside that country's borders onto the Singapore exchange. The new iShares tracks MSCI's India index, which covers 85 percent of the f ree float-adjusted market cap of each industry group in the Indian market.

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