Commodities have surged this year, luring in billions of investment dollars. Enticed by the big business found in commodities, a fund provider may soon come out with a new commodity exchange traded funds (ETFs) that will be backed by a long-only actively managed benchmark.
U.S. Commodity Funds has begun its paperwork to launch a new diversified commodities index ETF which would track the newly launched SummerHaven Dynamic Commodity Index (SDCI), an actively managed commodities futures index with positions in energy, precious and industrial metals, and agricultural commodities such as livestock, grains and softs, writes Lara Crigger for IndexUniverse.
SummerHaven Index Management picks 14 of 27 commodities based on fundamental factors and then weights the selected commodities equally in the portfolio. The index is rebalanced monthly, which makes the SDCI the first “long-only active benchmark for commodity investors,” comments the company. [2009: A banner year for commodity ETFs?]
SummerHaven was launched by Yale University Professor K. Geert Rouwenhorst. Yale Professor Gary Gorton is a senior advisor to SummerHaven, writes Matt Hougan for IndexUniverse. Rouwenhorst and Gorton wrote “Facts and Fantasies about Commodity Futures” in 2005, which helped legitimize commodities as an asset class.
The gist of the published paper revealed that commodity futures brought returns similar to those of equities but are uncorrelated with stocks and bonds. It also showed that historical risk of investment in commodity futures are low and a diversified commodities portfolio are slightly less riskier than stocks as shown by standard deviation. [Mining ETFs: Time to shine?]
In 2007, they published “The Fundamentals of Commodity Futures Returns,” which showed that an investor may improve upon returns by focusing on commodities with low inventory. The professors found that when inventories are low, commodities trade in backwardation (tomorrow’s product costs more than next year’s), and when inventories are high, commodities trade in contango (cheap today, costly next year). The resulting find was that backwardation portfolios outperformed the equally weighted index in a sampling from 1969 to 2006. [Reasons to be bullish on natural gas.]
For more information on commodities, visit our commodity category.
Max Chen contributed to this article.
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