Jefferies, an up-and-coming player in the commodity ETF space, has applied for SEC approval on two new commodity ETFs. The Jefferies TR/J CRB Commodity Index ETF (CRB) and the Jefferies Commodity Real Return ETF (RRET) will focus on similar commodities, but would be far from identical. CRB’s underlying index tracks the prices of near-month rolling futures on a diversified basket of commodities, while RRET will invest in futures contracts of commodities included in the CRB 3-Month Forward Index, which tracks closing levels of futures positions that would comprise the CRB index in three months.
The index invests in a wide variety of commodities, including aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gasoline, and wheat. In order to determine the weightings, the index uses a four tier approach. Energy contracts make up 33% of the fund, with just under 23% going towards West Texas Crude Oil. The next tier, which makes up 42% of the fund, consists of highly liquid commodities such as natural gas, gold, and copper, all of which have individual weightings of 6%. The third tier consists of four, slightly less liquid commodities which are all weighted 5% each. This tier includes sugar, cotton, coffee, and cocoa. The last tier makes up the smallest weighting (just 5% in total) and includes commodities that may offer diversification benefits, such as silver, nickel, and wheat.
In addition to investing in long futures contracts, the two funds will invest in government securities during the period between buying the futures and the time that the payments become due. The Jefferies TR/J CRB ETF invests in 3-month U.S. Treasury bills while the Jefferies Real Return ETF uses TIPS and other high credit quality short-term fixed income securities to provide excess return.
The exchange-traded commodity space has seen rapid growth in recent years, and appears poised for another round of innovation. In addition to the proposed funds from Jefferies, U.S. Commodity Funds will reportedly team up with SummerHaven to launch an active alternative to commodity investing.
Disclosure: No positions at time of writing