The Ultimate Guide To Resource-Specific “Third Generation” Commodity ETPs

by on March 25, 2013 | ETFs Mentioned:

For retail investors, ETFs have leveled the playing field and opened all sorts of alternative asset classes and strategies to the mainstream. One asset class that has surged in popularity has been commodity and natural resource investing. As such, the number of ETFs in this area has exploded and now represents one of the largest fund categories around. Currently, there are over 110 different funds that track futures and hard asset prices [see Free Report: How To Pick The Right ETF Every Time].

However, early products in the space, like the United States Natural Gas (UNG), suffer from a potentially big problem in the concept of contango. Contango can lead to underperformance and even losses in an ETF. By definition, contango occurs when near month future contracts are cheaper than those expiring further into the future.

ETFs based only on current prices–meaning they own the future contract for the currentCommodity Investing month–lose money if a commodity sector is currently in contango because the funds have to buy the higher-priced, longer-dated contract and sell the cheaper spot month; they are technically selling low and buying high. For example, using UNG from above, if the fund is holding natural gas futures contracts for April, at some point it will have to roll them over to May contracts. If the April contract is worth $2 and the May contract is worth $3, it’s losing $1 per contract [see also Futures Free Commodity ETFdb Portfolio].

To combat this effect and its reverse–called backwardation–several fund sponsors have unveiled new products specifically designed to tackle the problem. These third generation commodity products use flexible-futures trading strategies–such as blending contracts or optimized roll yields–instead of just automatically rolling to the next month’s contract. So far, many of these products have successfully been tracking rising commodity prices better than traditional roll yield products.

For investors, using these products could be the best way to gain access to individual commodities without owning a futures account. Here’s a look at all the resource-specific third generation products available:

Agriculture, Livestock and Softs

Ticker ETP Expense Ratio
DBA  PowerShares DB Agriculture 1.01%
CORN Teucrium Corn 1.00%
SOYB  Teucrium Soybean 0.75%
WEAT Teucrium Wheat 0.75%
UBC UBS E-TRACS CMCI Livestock TR ETN 0.65%
LSTK iPath Pure Beta Livestock ETN 0.75%
CHOC iPath Pure Beta Cocoa ETN 0.75%
DIRT iPath Pure Beta Agriculture ETN 0.75%
WEET iPath Pure Beta Wheat ETN 0.75%
CAFE iPath Pure Beta Coffee ETN 0.75%
CANE Teucrium Sugar 1.00%
USAG United States Agriculture Index ETF 0.80%
TAGS Teucrium Agricultural ETF 0.32%
CTNN iPath Pure Beta Cotton ETN 0.75%
GRWN iPath Pure Beta Softs ETN 0.75%
SGAR iPath Pure Beta Sugar ETN 0.75%
FUD UBS E-TRACS CMCI Food ETN 0.65%
UAG UBS E-TRACS CMCI Agriculture 0.65%
  • DBA: This fund employs an “Optimum Yield” strategy in which it looks 13 months out on the futures curve and selects the contracts that are deemed to be the best in minimizing the negative effects of rolling futures contracts forward when a market is in contango.
  • SOYB, CORN, WEAT, CANE, TAGS: Teucrium’s funds track a basket of three futures contracts for underlying commodities. In the case of TAGS, all three–specifically the second-to-expire, third-to-expire and the contract expiring in December–that are traded on the Chicago Board of Trade [see ETF Technical Trading FAQ].
  • GRWN, SGAR, CTNN, WEET, CAFE, DIRT, CHOC, LSTK: iPath’s Pure Beta ETNs use a propriety rolling strategy created by Barclays that may roll the futures into one of a number of futures contracts with varying expiration dates to limit the effects of contango.
  • UBC, UAG, FUD: UBS’s E-TRACS ETNs use an index of commodity futures contracts diversified across three constant maturities from three months up to one year. This helps cut down on the effects of contango by spreading out the various funds’ bets.
  • USAG: Each of the commodities in USAG is assigned a “base weight” in the underlying index that is determined from factors such as overall economic importance. However, on a monthly basis, adjustments are made to these base weights depending on current market conditions. That makes USAG an active choice for fighting contango.

Energy

Ticker ETP Expense Ratio
DBE PowerShares DB Energy 0.78%
OILZ UBS E-TRACS Oil Futures Contango ETN 0.85%
GASZ UBS E-TRACS Natural Gas Futures Contango ETN 0.85%
CRUD Teucrium WTI Crude Oil 1.00%
UBN UBS E-TRACS CMCI Energy ETN 0.65%
OLEM iPath Pure Beta Crude Oil ETN 0.75%
NAGS Teucrium Natural Gas 1.50%
TWTI RBS Oil Trendpilot ETN 1.10%
ONG iPath Pure Beta Energy ETN 0.75%
  • DBE: Like its sister ag fund DBA and the rest of PowerShares DB suite, the PowerShares Energy ETF uses the same “Optimum Yield” roll strategy across five different energy commodities [see also Everything You Need To Know About Commodity ETFs].
  • OILZ, GASZ: These two ETNs from UBS fight contango by providing short exposure in front-month-respective energy commodity contracts and long exposure in mid-term futures contracts. This is achieved by taking a 100% long position in the components of the ISE Short Front Month oil or Nat. Gas Contract and an aggregate 150% long position in the components of the ISE Sixth Month oil or Nat. Gas Futures Index, ISE Seventh Month and ISE Eighth Month.
  • CRUD, NAGS: As with Teucrium’s other products, both of these funds use the same blend of three futures contracts to eliminate contango in their respective energy commodities.
  • TWTI: This ETN from Royal Bank of Scotland uses a unique systematic trend-following strategy to provide exposure to either oil prices via the RBS 12-Month Oil Total Return or the yield on a hypothetical investment in three-month U.S. Treasury bills, depending on the relative performance of the oil on a simple historical moving average basis. Basically, if oil is on a roll, the fund will buy futures; if it’s dropping, the fund owns T-bills.

Industrial Metals

Ticker ETP Expense Ratio
LEDD iPath Pure Beta Lead ETN 0.75%
FOIL iPath Pure Beta Aluminum ETN 0.75%
NINI iPath Pure Beta Nickel ETN 0.75%
HEVY iPath Pure Beta Industrial Metals 0.75%
CUPM iPath Pure Beta Copper ETN 0.75%
CPER United States Copper ETF 0.65%
DBB PowerShares DB Base Metals ETF 0.78%
USMI United States Metals Index ETF 0.70%
UBM UBS E-TRACS CMCI Industrial Metals ETN 0.65%
  • LEDD, FOIL, NINI, HEVY: iPath leads the way in third generation industrial metal ETPs with its suite of four funds. Like the rest of its Pure Beta series, these ETNs employ the Barclays strategy of rolling the futures contracts into one of a number of other contracts with varying expiration dates [see 10 Questions About ETFs You've Been Too Afraid To Ask].
  • CPER, USMI: These funds are based on futures contracts that are selected on a monthly basis using quantitative formulas developed by SummerHaven Indexing. The two indexes are rules-based and are rebalanced monthly based on observable price signals.

Precious Metals

Ticker ETP Expense Ratio
USV iUBS E-TRACS CMCI Silver TR ETN 0.40%
UBG UBS E-TRACS CMCI Gold TR ETN 0.30%
PTM UBS E-TRACS Long Platinum TR ETN 0.65%
DBP PowerShares DB Precious Metals ETF 0.79%
DGL PowerShares DB Gold ETF 0.79%
DBS PowerShares DB Silver ETF 0.79%
TBAR RBS Gold Trendpilot ETN 1.00%
BLNG iPath Pure Beta Precious Metals ETN 0.75%
GLDI Gold Shares Covered Call ETN 0.65%
  • TBAR: Like TWTI, TBAR uses RBS’s trend-following strategy to provide exposure to either the price of gold bullion or the yield on an investment in U.S. Treasury bills, based on how gold is trending with regards to a simple historical moving average [see also The Ten Commandments of Commodity Investing].
  • GLDI: This new ETN also provides a unique opportunity in the gold sector. The fund seeks to track the return of a “covered call” option strategy on the shares of the physically-backed SPDR Gold Trust (GLD). The ETN pays a monthly variable coupon based on the option premiums received from the sale of covered call options on GLD. The index that GDLI tracks reflects changes in the price of the GLD shares and those option premiums.

The Bottom Line

Exchange-traded funds in the commodity space have certainly come a long way from their humble beginnings. Today’s third generation products track various new indexes designed to mitigate the effects of contango and backwardation on the fund’s returns. While not as popular as their first generation cousins, these new products could be exactly what investors need to realize positive commodity returns in a portfolio. Over time, many of these products will undoubtedly become the go-to way investors get their natural resources fix.

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Disclosure: No positions at time of writing.