Commodity ETF Looks to Limit Contango Risk
NEW YORK (
) --
United States Commodity Index ETF
(USCI) - Get Report
is a play for those looking for broad commodities exposure that don't want to worry about the everyday movements of the futures market according to Morningstar's Paul Justice.
Like other recently launched ETFs, the fund follows a dynamic approach to investing in commodity futures compared to older index-based ETFs. USCI tries to minimize the losses of contango markets (where expiring future contracts trade at a lower price than the next month contract, forcing funds that "roll over" their contracts to buy at higher and higher prices) and maximize gains in backwardated markets (the opposite of contango).
It differs from other funds in that it hones in on commodities where the futures curve is favorable -- or when the market is in backwardation. USCI offers broad exposure to all commodity sectors. Within each subsector, the fund targets the seven commodities that are most heavily backwardated and then the seven commodities that have the most momentum.
"You can avoid the effects of contango markets. The fund also focuses on commodities with the strongest momentum. Momentum signals in commodities tend to be stronger than in equities," says Justice.
Morningstar recommends investors allocate no more than 10% of their total assets to the fund as a core holding.
The fund has an expense ratio of 0.95%, which Morningstar estimates is reasonable relative to peers.
USCI is taxed as a partnership. Annual gains in the fund will be taxed regardless of whether you sell the fund with all gains taxed 60% at long-term capital-gains rates and 40% at prevailing short-term rates.
-- Written by Shanthi Bharatwaj in New York
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