Teucrium, the exchange traded fund (ETF) provider behind Teucrium Corn (NYSEArca: CORN) is out with its next fund: a natural gas ETF based on a strategy that mitigates the corrosive effects of contango.
Teucrium Natural Gas (NYSEArca: NAGS) is built around a benchmark Teucrium created that’s specific to natural gas.
Teucrium co-founder and President Sal Gilbertie – a former natural gas trader himself – explains that the fund is 25% each of four futures contracts: March, April, October and November. Those months are otherwise known as “shoulder months,” when demand has the potential to make a big move in one direction or another.
Focusing the fund on those months has the potential to give natural gas investors some big benefits, while addressing a couple of the recent issues concerning commodity funds that have cropped up in recent years.
The first is that the Commodity Futures Trading Commission (CFTC) investigated the role, if any, of futures-based ETFs in moving the prices of their underlying markets. The inquiry came as a result of the record run-up in oil prices in 2008, but no conclusive answer was ever really found.
More recent scrutiny has centered around the role of contango – when the spot price is lower than the futures price – in the performance of commodity funds.
Teucrium deals with the pricing and contango issues that often plague other futures-based ETFs by avoiding trading the spot month altogether.
“We don’t ever want to be in any discussion on whether they’re going to affect prices. If you avoid spot, that’s where the effect is the most extreme,” Gilbertie says.
Structuring a fund around the shoulder months keeps a lid on portfolio turnover. Only 25% of the portfolio is rolled four times a year, limiting turnover to 100%.