First Broad Based U.S. Commodities ETF Wins SEC Approval

December 15, 2005

Deutsche Bank has won approval for its commodities ETF in shockingly short order. The new fund has been cleared by the SEC and is set to launch in early 2006.

In a stunning development, Deutsche Bank has won approval for its commodities ETF from the SEC, just over 6 months after filing for the product with the SEC.  The approval is another landmark development in the evolution of U.S. exchange-traded funds (ETFs).  The fund will be the first-ever ETF to trade in the U.S. that will itself be based on derivatives (futures).  This is a landmark occasion, because once ETFs can be based on futures, it is Katie Bar the Door on what can be equitized and traded on the stock market.

To read much more about the ETF review the actual S-1 Filing for the product here.

The Deutsche Bank ETF will provide investors with unprecedented direct and inexpensive direct access to a broad-based commodies basket.  The Deutsche ETF is based on Deutsche Bank's own simplified commodities index, which includes exposure to 6 key commodities baskets.  The ETF will consist of an underlying basket of fixed-income securities and commodities futures and will employ a creation and redemption mechanism like any other ETF.  The Deutsche Bank Commodity Index Tracking Fund will charge fees of up to 1.45%, but is expected to earn over 2.5% a year in income because of how the underlying works.

Look for more analysis of the tax issues, leverage and structural issues unique in this fund and the iShares products in future coverage.

The Deutsche Bank ETF should be the first broad-based commodities ETF to make it to market, barring a leapfrog from The iShares GSCI ETF  (iShares recently pulled off the feat with their Russell Microcap iShare just beating PowerShares Zacks Microcap ETF to market after PowerShares had already announced their plans for launch.  Such a stealthy success in this instance seems unlikely, as the Deutsche Bank Product filed for launch on May 27th, while the BGI iShares product (which is based on the GSCI) did not file with the SEC until July 22nd.

Interestingly, the Europeans actually made it to market first with a commodities ETF when the EasyETF Goldman Sachs Commodities Index (GSCI) ETF was launched last year.  That product, sponsored by BNP Paribas and Axa Investment Managers won the award for most innovative index fund/ETF at the 2005 William F. Sharpe Innovations in Indexing awards this year.

The European ETF is modeled on the Goldman Sachs Commodity Index (GSCI). DB's U.S. fund, in contrast, will track a different index: Deustche Bank's own "Liquid Commodity Index," a production-weighted index of six commodities: sweet light crude, heating oil, aluminum, gold, wheat and corn.  The fund will carry a hefty expense ratio of up to 1.45 percent, but will offset that with an expected interest income of 2.5 percent per year.

Interestingly, the iShares fund will be much cheaper, with an expense ratio of 0.75 percent. 

The GSCI, for the record, is heavily-dominated by oil exposure, although it does offer a smattering of exposure to other products as well. 

In will be interesting to see how quickly iShares can bring their ETF to market.  The iShares product will be anticipated for different reasons, as the GSCI is heavily concentrated in oil, which is definitely a hot commodity at the moment.  In the approval process, Deutsche Bank drew on its experience in Europe to bolster its bid, while BGI boasts a great history of working with the SEC - so the iShares are likely not far behind, if they are behind.  One factor that may help BGI is that there are futures and options tied to the GSCI, which will allow arbitrageurs to do their work with relative ease, ensuring that the share price of the fund sticks close to its net asset value.

They're back!  In 1996 just one week after the Morgan Stanley-sponsored WEBS (now iShares) came to market, the firm Morgan Grenfell (now Deutsche Bank) introduced nine single-country ETFs called Country Baskets, which were listed on the New York Stock Exchange. Limited trading volumes and a change in management at Deutsche Bank did not bode well for these now forgotten ETFs. 

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