U.S. Commodity Funds hopes its latest contango-killing ETF, a broad ag fund, is a hit.
United States Commodity Funds, the company best known for its $1.49 billion U.S. Oil Fund (NYSEArca: USO), today rolled out a broad futures-based agricultural strategy that takes direct aim at Invesco PowerShares’ DB Agriculture Fund (NYSEArca: DBA) with a slightly more diversified portfolio.
The U.S. Agricultural Index Fund (NYSEArca: USAG) will own futures contracts in 14 different commodities, adding soy oil, soymeal and canola futures to the other 11 commodities also found in DBA’s basket. That broader exposure will cost about 1.20 percent, including a 0.95 percent management fee, which compares to DBA’s 1.01 percent price tag.
Commodities ETFs gained popularity in recent years, particularly on the heels of the 2008 credit crisis as a viable alternative to equities when markets were working through an economic recession affecting much of the developed world. DBA certainly benefited from that momentum, and now has $1.92 billion in assets.
But commodities, as an asset class, have since shed some of its luster. In the last year ended March 31, for instance, while portfolios invested in long-dated Treasurys returned more than 25 percent and the S&P 500 Index gained 8.5 percent, DBA’s price tanked nearly 18 percent, PowerShares data showed. Much of that weakness is linked to slowing growth in China.
Some of the ETNs in the space tell the same tale, with the $133 million iPath Dow Jones UBS Agriculture Total Return Sub-Index ETN (NYSEArca: JJA) shedding more than 17 percent in the past 12 months, while the $406 million Elements Rogers International Commodity-Agriculture Total Return ETN (NYSEArca: RJA) dropped some 21 percent in the same period, according to data on Google Finance.
Still, USAG has on its side the brand-name recognition of U.S. Commodity Funds.
The new fund also takes on one of the chief risks in the futures-based commodities ETFs space: contango.
The fund picks contracts along the futures curve of each commodity with a view of cherry-picking those contracts with either the least contango or the most backwardation.
Contango is a condition where the nearest month in a futures market is the cheapest one on the futures curve, causing fund managers to have to pay up every time they roll their position into a new contract as a given contract expires. Backwardation is the opposite, meaning the nearest month’s is more expensive than following months, meaning a futures-based fund picks up returns each time exposure is rolled into a cheaper contract that expires further in the future.
Further, USAG overweights seven of the 14 commodities that have the least contango or the most backwardation, while at the same time underweighting the seven contracts that have maximum contango or minimum backwardation.
The two-level strategy that’s rebalanced monthly aims to minimize the corrosive effects contango has on portfolio returns while maximizing the positive effects of backwardation.
The 14 commodities comprising USAG’s basket include soybeans, corn, soft and red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs.
Third-Generation Commodities ETFs
The fund’s diversified approach to the space amounts to what some call third-generation commodities funds.
Teucrium’s Agricultural ETF (NYSEArca: TAGS) is another newcomer to the space of broad agricultural funds, although TAGS is a fund-of-funds that invests in four other ETFs, each targeting the corn, wheat, soybean and sugar futures markets respectively. TAGS was launched two weeks ago.
U.S. Commodity Funds derives its more sophisticated futures-based strategies from Stamford, Conn.-based SummerHaven Index Management, one of which is now underlying USAG.
SummerHaven's partner and founder Geert Rouwenhorst legitimized futures-based commodities investing in a seminal work he first published with Gary Gorton about half a decade ago.
United States Commodity Funds first began licensing rules-based commodities investing strategies from SummerHaven in 2010.