‘Third Generation’ Commodity ETF Launches | ETF Trends

A new commodity exchange traded fund (ETF) from SummerHaven and U.S. Commodity Funds finally seems to solve an age-old problem with diversified commodity ETFs.

The U.S. Commodity Index Fund (NYSEArca: USCI) chooses from a basket of 27 eligible commodities, but only 14 are held at any given time. Most existing broad commodity ETFs hold baskets of all those commodities at once, treating them as one single asset class. Many feel that taking a passive approach to commodity investing doesn’t necessarily work.

SummerHaven partners Kurt Nelson and Yale Finance Professor and commodities expert K. Geert Rouwenhorst developed the SummerHaven Dynamic Commodity Index (SDCI) out of this belief. [How Not to Get Burned By Commodity ETFs.]

Each month, the index looks at the universe of commodities and makes its selections for what will be included that month based on price information and what’s lowest in inventory. Their methodology removes the markets that are in contango, and to further mitigate the effect, futures contracts in the fund range anywhere from three months to 12 months out. [Why Oil ETFs Are Rising.]

“We invest out along the curve and we spread our bets evenly,” says Rouwenhorst. This has the effect of diversifying the fund so that it doesn’t concentrate on any one particular commodity. Rouwenhorst and Nelson note that this is the first time a ETF has taken the leap into actively managing a basket of commodities.