Investors interested in gaining commodity market exposure without the hassle of dealing with the pesky K-1 form can look to USCF’s new actively managed dynamic commodity exchange traded fund strategy.
On Thursday, United States Commodity Funds launched the actively managed USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (NYSEArca: SDCI).
“SDCI has been a major component of our plan to offer investors truly diversified access to the commodity space,” John Love, President and CEO of USCF, said in a note. “The SummerHaven Dynamic Commodity Index ushered in a new generation in commodity indexing. Rather than making incremental changes to established benchmarks, the index was built from the ground up in 2009 placing the needs and goals of investors first. Investors have frequently asked for an investment vehicle that is guided by the SummerHaven Dynamic Commodity Index but that does not issue a K-1 tax form, and the ETF structure of SDCI enables us to do that.”
The USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund starts off with the same group of securities as the United States Commodity Index Fund (NYSEArca: USCI). USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backdated contracts and then the seven highest-returning contracts.
The ETF is based off the SummerHaven Dynamic Commodity Index Total Return Index, which consists of 14 commodity futures. The index is reformulated each month from 27 possible futures contracts. The 14 selected contracts are equally weighted and represent six sectors: Energy (WTI crude oil, Brent crude oil, natural gas, heating oil, gasoil, RBOB gasoline), Precious Metals (gold, silver, platinum), Industrial Metals (aluminum, copper, lead, nickel, tin, zinc), Grains (corn, soybeans, soybean meal, soybean oil, wheat), Livestock (live cattle, feeder cattle, lean hogs) and Softs (coffee, cocoa, cotton and sugar).
“The new SDCI is a broad commodity ETF that uses the same benchmark as USCI,” Love told ETF Trends in a call. “The biggest difference is that it has no K-1.”
Commodities ETFs and other funds that use futures contracts to gain exposure to a market are structured as limited partnerships. Consequently, investors have to fill out a Schedule K-1 instead of Form 1099. The actively managed SDCI is structured as normal 1940 Act fund, so the ETF enjoys the favorable and easy to file tax treatment many investors are accustomed to and still allows investors to access the broad commodities market.
“We are excited to build on our long-term collaboration with USCF and to leverage the great success of our other funds,” Ashraf Rizvi, Partner of SummerHaven, said in a note. “This new Fund utilizes the established SummerHaven Dynamic Commodity Index as its benchmark, providing an attractive commodity ETF with no K-1 for investors.”
As investors look to diversify away from the ongoing market risks, Love argued that people should consider commodity exposure. He believed that investors are overlooking the diversification and hedging opportunity that commodities may provide, especially as they have historically generated relative low correlations to traditional assets like stocks and bonds.
Furthermore, with a growing global economic outlook that could fuel demand for raw materials and rising inflationary pressures due to an expanding economy, commodities can be a good way for investors to add another layer of diversification to a traditional portfolio mix, Love argued.
For more information on new fund products, visit our new ETFs category.