Ultimate Guide To United States Commodity Index Fund (USCI)

by on October 24, 2012 | ETFs Mentioned:

Interest in commodity investments has boomed in recent years, and billions of dollars have poured into the space, most noticeably in the form of exchange-traded products. With so many choices out there, it’s well worth taking the time to highlight special cases that may offer investors unique opportunities; the United States Commodity Index Fund (USCI) is one such fund [see Everything You Need To Know About Commodity ETFs].

In A Nutshell

Launched in August of 2010, USCI takes a more active rules-based approach to commodity investing. The fund is designed to track the SummerHaven Dynamic Commodity Index Total Return, an index that selects 14 of a possible 27 commodities each month. The underlying benchmark is also re-balanced every month and gives equal weight to all holdings. Seven of the holdings are chosen on the basis of backwardation (those that have the most make the cut), with the other seven chosen on the basis of the best trailing 12-month performance [see Commodity Guru ETFdb Portfolio].

What Makes USCI Unique

USCI is different from well-known “first generation” commodity ETPs in numerous ways. To start with, it’s not even technically an ETF; while it does trade on Nasdaq, it’s legally organized as a trust, which means investors will receive a K-1 every year, and this may complicate their taxes.

USCI also stands out for its distinctive asset selection process. Most commodity ETFs are based upon indexes that are adjusted much less frequently and are often based upon the weighting of commodities in futures trading or global trade. Consequently, USCI’s holdings change much more frequently, but not through active management decisions. Furthermore, while contango is often problematic for ETFs that continually roll contracts, this fund attempts to minimize the negative effects of this common headwind.

How It Fits

USCI arguably makes the most sense in a more aggressive portfolio; one that seeks to actually outperform a broader and more static index of commodities. Because the portfolio’s weightings are somewhat unpredictable on a month-by-month basis, it is not an appropriate core holding for investors who wish to always have a guaranteed amount of exposure to particular commodities. However, the fund is arguably less risky than more fixed single-commodity/single-category funds, as it combines a momentum strategy with a more value-oriented approach [see Ultimate Guide To "Third Generation" Commodity ETPs].

What It’ll Cost You

USCI is not a particularly cheap security. This instrument charges a fairly steep 0.95% expense ratio considering its category average of 0.77% with a range from 0.50% to 1.25%. Furthermore, the fund’s legal status as a trust could create potential tax issues for some investors. At present, USCI is not available for commission free trading [see USCI Realtime Rating].

Under The Hood

Because of its monthly portfolio reallocation rules and unique strategy, a review of USCI’s holdings is irrelevant. The underlying portfolio is dynamic and consists of 14 commodity futures contracts [see USCI Fact Sheet].

Yield, Volatility, And Performance

USCI is not structured to produce income. The fund’s expected volatility should fall in line with broad commodity benchmarks like the popular S&P GSCI Total Return Index. Given USCI’s limited track record, historical performance analysis is quite limited; this ETF posted a loss of 9.5% in 2011 while DBC, one of its closest competitors, shed only 2.6%.

Other Options

Because of its frequent re-balancing, as well as its split strategy of basing portfolio allocations on backwardation and trailing performance, USCI truly sets itself apart. Other broad-based commodity offerings include:

  • PowerShares DB Commodity Index Tracking Fund (DBC): This is the biggest ETP covering the commodity asset class; DBC has accumulated a whopping $6.2 billion since launching in early 2006.
  • iPath Dow Jones-UBS Commodity Index TR ETN (DJP): This is another popular broad-based commodity instrument, although it is structured as an ETN which may appeal more to certain investors looking to access this asset class.
  • iShares GSCI Commodity-Indexed Trust (GSG): This commodity trust is another popular option, however, it’s index is heavily titled towards the energy sector.

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Disclosure: No positions at time of writing.