“Expected long-only futures return = Risk-free rate + Spot-price return + Roll yield + Diversification return,” Lee said.
By optimizing futures exposure levels, an ETF can potentially generate excess profits. For instance, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) and United States Commodity Index Fund (NYSEArca: USCI) eschew rolling front month contracts, which can lead to underperformance, especially in a contangoed market. Instead, DBC targets futures contracts that offer the highest implied roll yield while USCI rebalances each month and selects the most-backwardated contracts and then the seven highest-returning contracts.
“By intelligently adjusting their exposures, the ETFs stand a chance to eke out excess profits,” Lee added.
Additionally, Teucrium Trading LLC offers a suite of corn, natural gas, crude oil, soybeans, sugar and wheat ETFs that are designed to diminish the effects of contango and backwardation. The Teucrium ETFs track multiple futures contracts with varying maturities. However, the ETFs may not optimize contracts to maximize the benefits of backwardation.
Due to the way these futures-backed ETFs are structured, ETF investors ma have to fill out the complex K-1 form. However, the recently launched PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (NasdaqGM: PDBC) also tries to maximize potential roll yield returns but is structured as a 1940s Act Registered Investment Company, so investors would only have to fill out a form 1099. [An Active Commodity ETF That Optimizes Returns]
For more information on the commodities market, visit our commodity ETFs category.
Max Chen contributed to this article.