Daily ETF Watch: New Commodity Fund

November 07, 2014

Invesco PowerShares, fresh from inking a proposed deal to next year take over an 11-fund suite of futures-based commodity ETFs from Deutsche Bank, today rolled out a different kind of commodity ETF that will allow investors to be taxed just as they are when they hold equity funds.

The PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (PDBC) is an actively managed fund that will also hold futures contracts, but will do so through a Cayman Islands-based unit. That Cayman Islands structure, already used by a number of other ETF sponsors, exploits a loophole in U.S. tax law and will allow the fund to avoid using “K-1” tax forms reserved for futures investments.

The 11 funds PowerShares plans to take over from Deutsche Bank next year, including the nearly $5 billion PowerShares DB Commodity Index Tracking Fund (DBC | B-86), are taxed using “K-1” tax forms. Enough investors and advisors dislike “K-1” forms and the particularities of futures-investment taxation to make the pursuit of funds such as the new “PDBC” a worthwhile initiative.

Explaining its motivation to enter into the transaction with Deutsche, Invesco PowerShares said in a press release that it aims to fully develop a suite of futures-focused ETF offerings, including funds like the new “PDBC” that will use “1099” tax forms required of funds registered under the Investment Company Act of 1940.

It’s no accident the tickers “DBC” and “PDBC” are so similar. Side by side, they constitute a complete reflection of the choices investors have to obtain futures-related exposure.

The new PowerShares fund, PDBC, comes with a net annual expense ratio of 59 basis points, or $59 for each $10,000 invested.

One of the ETF market’s commodity funds using the Cayman Islands structure is the First Trust Global Tactical Commodity Strategy (FTGC | C-66). The fund has total assets under management of around $200 million and has an annual expense ratio of 95 basis points.

 

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