New Van Eck Mutual Fund Targets Contango

January 07, 2011

Van Eck Global, the New York-based fund company known for its expertise in natural resources investing, jumped into the world of enhanced commodity funds this week, rolling out a broad-based index mutual fund that’s designed to cut the negative effects that so-called contango has on returns.

The Van Eck CM Commodity Index Fund is designed to track the UBS Bloomberg Constant Maturity Commodity Total Return Index, and includes 26 commodities. It was designed to minimize investment exposure to the front end of the futures curve by diversifying across five different maturities, the company said in a press release.

Contango occurs when futures with further-out expiration dates cost more than those with nearer expiration dates. It erodes fund returns because managers have to pay up when they “roll” positions from expiring contracts to later-month ones to maintain exposure. Much effort has gone into trying to minimize contango’s effect, particularly in the world of exchange-traded products.

The fund, which has net expense ratios of 0.95 percent, 0.70 percent and 0.65 percent, depending on the share class, tracks the same index as the UBS E-TRACS CMCI Total Return ETN (NYSEArca: UCI). UCI is an exchange-traded note based on an index composed of 28 futures contracts with up to five maturities for each commodity. ETNs, unlike ETFs, which have actual holdings, are debt obligations that promise returns of a given index, minus expenses. UCI has an expense ratio of 0.65 percent.

Another commodity ETP with contango in its cross-hairs is the United States Commodity Index Fund (NYSEArca: USCI). It’s based on the SummerHaven Dynamic Commodity Index (SDCI), an actively oriented commodities futures index that has positions in energy, precious and industrial metals, and agricultural commodities, including livestock, grains and softs. It has an expense ratio of 0.95 percent.

SummerHaven’s Co-Founder and Director of Research Geert Rouwenhorst is one of the pioneers of commodities investing. Rouwenhorst, also a professor at Yale University, is perhaps best known for a paper he co-authored with Gary Gorton, Facts and Fantasies about Commodity Futures. The paper kicked off the surge of commodity investing seen in the past several years. Gorton is a senior advisor to SummerHaven.


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