BlackRock’s iShares on Friday introduced a new futures-based commodities ETF designed to mitigate the corrosive effects of “contango.”
The new iShares Dow Jones-UBS Roll Select Commodity Index Trust (NYSEArca: CMDT) currently tracks 22 commodities futures contracts, including agriculture, energy and metals, and is designed to minimize the costs of closing expiring futures contracts and replacing them for new ones.
“Many investors look to commodities to diversify beyond stocks and bonds, but when investing in commodity funds that typically hold futures contracts, the buying and selling of contracts can detract from fund performance,” said Ravi Goutam, Head of Americas Product for iShares at BlackRock.
The new ETF “seeks to minimize the costs of changing or ‘rolling’ futures contracts, enabling the Trust to ultimately provide investors efficient access to diversified commodities,” Goutam added. [How Contango Can Affect Your Commodity ETF]
Futures-based ETFs maintain exposure to commodities by periodically rolling the contracts before they expire.
“If the fund is rolling contracts for costlier later-dated contracts then the commodity market is in ‘contango’, which may detract from performance,” BlackRock said. “If the later-dated contracts are less expensive than the contracts held by the fund, then the commodity market is in ‘backwardation’, which may add to performance.” [Futures-Based ETF in Focus as Gold Goes Into Backwardation]
CMDT’s tracking index rolls into the futures contract that shows the most backwardation or least contango, selecting from those contracts with nine months or fewer until expiration.
Other ETF providers have also introduced funds designed to lessen the negative impact of contango. One example is U.S. Commodity Index (NYSEArca: USCI).