Moreover, the benchmark includes a “smart” contract roll to minimize the negative effects of contango and maximize the positive effects of backwardation in the futures market. Expiring futures contracts are replaced based on an optimization process that selects a contract from a universe of futures contracts within the next 13 month period.
“Investors recognize the value of diversification and inflation protection provided by commodities within a portfolio,” Tim Pickering, Founder and CIO at Auspice Capital Advisors, said in a note. “We can seek to maximize these benefits with a tactical strategy that rides the strongest trends for upside potential, then allows for an exit to limit downside risk and volatility while providing for the best risk-adjusted results.”
The ETF will then try to exceed the return of the benchmark index through active management of a portfolio of Treasury bills, government securities, money market funds, cash, other short-term bond funds, highly rated corporate or other non-government fixed income securities.
COM will also utilize a subsidiary for purposes of investing in commodity futures contracts, which is wholly owned and controlled by the fund. Since the ETF itself does not hold or trade futures contracts but does so through the subsidiary, investors are not subject to troublesome K-1 forms come tax season.
“Commodities markets are cyclical and tend to revert to the mean. Traditional funds have long-only exposure to commodities, which limits their potential because investors can only benefit when commodity prices rise,” Edward Egilinsky, Managing Director at Direxion, said in a note. “Successfully investing in commodities depends on the ability to adapt to change. COM uses a long/flat (cash) approach to take advantage of rising commodity prices, in addition to mitigating risk when individual commodities are in downward trends. That makes it uniquely adaptive to volatile commodities markets. Its 40-Act structure means there’s no K-1 tax reporting.”
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