Van Eck Plans Contango-Killer Materials ETF

January 10, 2011

Van Eck to replicate contango-killing mutual fund with an ETF that’s similar to the ETN, 'UCI.'

Van Eck Global, the New York-based fund company known for its expertise in natural resources investing, filed paperwork with the Securities and Exchange Commission to market a broad-based commodity futures ETF. The ETF would be similar to a mutual fund the firm launched last week that’s designed to minimize the corrosive effect contango can have on futures-related returns.

The proposed Market Vectors CM Commodity Index ETF will invest in commodity-linked derivative instruments, such as commodity index-linked notes, swap agreements, commodity futures contracts and options on futures contracts that provide exposure to the commodities in the UBS Bloomberg Constant Maturity Commodity Total Return Index. That’s the same index the new Van Eck CM Commodity Index Fund uses.

The index is a rules-based benchmark diversified across 26 commodities from the following five sectors: energy, precious metals, industrial metals, agriculture and livestock. The index  comprises futures contracts with maturities ranging from around three months to over three years for each commodity, depending on liquidity. Van Eck didn’t say what the planned ETF’s expense ratio would be.

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.

Competing Contango-Killing Strategies

Van Eck's planned ETF 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. 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.

Invesco PowerShares is another company that offers broad-based commodity products with a view to controlling contango. Its PowerShares DB Commodity Tracking ETF (NYSEArca: DBC) is the oldest broad-based commodities exchange-traded product using futures on the market. It had more than $5 billion in assets as of Friday, Jan. 7, compared with $119.7 million for USCI and $134.7 for UCI, according to data compiled by

PowerShares has also rolled out an ETN that offers investors the option of gaining similar exposure in an ETN wrapper. DBC’s ETN counterpart, the PowerShares DB Commodity Long ETN (NYSEArca: DPU), had gathered $6.6 million as of last Friday.



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