Van Eck plans a broad future-based commodities ETF using a momentum strategy.
New York-based asset manager Van Eck Global filed paperwork with the U.S. Securities and Exchange Commission to bring to market a futures-based multicommodities fund that uses a momentum strategy designed to generate profits no matter which way markets are moving.
The Market Vectors Morningstar Long/Short Commodity ETF will be either long, short or “flat” a given commodity based on the strategy of its underlying Morningstar Long/Short Commodity Index. Positions will come under review in monthly rebalancings. The weight of each individual commodity in the underlying index is the product of two factors: magnitude, and the direction of the momentum signal.
Van Eck’s planned ETF is akin to the one-year-old $234 million WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI) and also bears resemblance to three managed futures ETF strategies ProShares put into registration in December 2011.
The focus on commodities in investment markets reflects a decade-long boom in agricultural products and industrial materials fueled largely by the growth of developing countries such as China. Moreover, some academic theories suggest that momentum trades are persistent in the commodities market, and that a simple momentum index can exploit those trends.
The prospectus of Van Eck’s proposed fund said that the following commodities may currently be considered for inclusion in the index:
WTI crude oil, Brent crude oil, heating oil, gasoil, RBOB gasoline, HHUB natural gas, copper, high-grade copper, zinc, aluminium, nickel, lead, tin, gold, silver, platinum, palladium, SRW wheat, HRW wheat, corn, soybeans, soybean meal, soybean oil, canola, sugar, cocoa, coffee, cotton, orange juice, rapeseed, milling wheat, rice, live cattle and lean hogs.
The underlying index for the Market Vectors ETF compares the “linked price” of each commodity to the 12-month moving average of the linked price.
For example, if, at a monthly rebalancing, the linked price for a commodity exceeds its 12-month moving average, the index takes the long side in the subsequent month. Conversely, if the linked price for a commodity is below its 12-month moving average, the index takes the short side.
Exceptions to the fund’s momentum-based rule are made in the energy sector.
If the signal for a commodity in the energy sector is short, the weight of that commodity is moved to a flat position, namely cash. According to the prospectus, energy is treated differently because its price is extremely sensitive to geopolitical events and not necessarily driven only by supply-demand imbalances.
To be considered for inclusion in the underlying index, a commodity futures contract must be listed on a U.S. exchange, be denominated in U.S. dollars and rank in the top 95 percent by total U.S. dollar value of the total open interest pool of all eligible commodities.
The futures contracts in the fund will be listed, variously, on the NYMEX, the InterContinental Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade and the Kansas City Board of Trade, according to the filing.
One of the principal risks of investing in the proposed fund comes from the short positions it may take. Short positions carry the risk of unlimited loss on a short position, since the price at which the fund would need to cover a short position could theoretically increase without limit.
The prospectus for the ETF didn’t include a ticker or an expense ratio, but it did indicate the fund will be listed on Arca, the New York Stock Exchange’s electronic trading platform.