United States Commodity Funds announced this week the debut of an ETF that offers exposure to a basket of metals futures contracts, giving investors seeking exposure to this corner of the commodities market a new tool at their disposal. The United States Metals Index Fund (USMI) will seek to replicate the SummerHaven Dynamic Metals Index Total Return, a benchmark that shifts exposure between various contracts based on market conditions.
USMI will be unique in that it will offer exposure to both industrial and precious metals. While there are a number of products in both the Metals and Precious Metals ETFdb Categories, there are few existing exchange-traded products that combine these asset classes. Specifically, the underlying index will include six base metals and four precious metals:
Each metal will be assigned a “base weight” based on liquidity and overall market importance. From there, adjustments will be made based on prevailing market conditions, through a process effectively designed to shift towards commodities that are assessed to be in a low inventory state and away from those assessed to be in a high inventory state.
Specifically, the process for determining which metals to overweight will be as follows:
- Three metals with the highest annualized price difference between closest-to-expiration and second closest-to-expiration (i.e., most significant backwardation or least significant contango) are selected
- From remaining seven, the two metals with highest percentage price change (i.e., momentum) over the previous 12 months are selected
The five selected metals will have their weights increased 3% from their base weights, while the weights of the other five will be reduced by 3% each. That process, which is completed monthly, should have the effect of tilting exposure towards commodities in a state of contango or with strong momentum, and away from those with poor performances over the last year and/or steep contango [sign up for the free ETFdb newsletter].
At the end of 2012, the underlying index allocated about 57% to industrial metals and 43% to precious metals.
USMI will charge a management fee of 0.70%. This product is structured as a commodity pool, meaning that gains will be taxed at a blended capital gains rate of about 23%. Investors should also note that USMI will deliver a K-1 at the end of the year.
USMI is the latest in a growing lineup of ETFs from USCF linked to indexes maintained by SummerHaven. Though the specifics of these benchmarks vary, the underlying thesis is similar: tilt exposure towards commodities deemed to be in a state of low inventory. Other USCF ETFs include:
- United States Commodity Index Fund (USCI)
- United States Agriculture Index Fund (USAG)
- United States Copper Index Fund (CPER)
Disclosure: No positions at time of writing.