{"id":2203,"date":"2021-07-13T06:10:39","date_gmt":"2021-07-13T06:10:39","guid":{"rendered":"https:\/\/investwithanedge.com\/?page_id=2203"},"modified":"2021-07-13T06:10:39","modified_gmt":"2021-07-13T06:10:39","slug":"usci-the-commodity-etf-evolves","status":"publish","type":"page","link":"https:\/\/investwithanedge.com\/usci-the-commodity-etf-evolves\/","title":{"rendered":"USCI – The Commodity ETF Evolves"},"content":{"rendered":"

The United States Commodity Index Fund (USCI) began trading last Tuesday (8\/10\/10). The fund\u2019s objective is to match the SummerHaven Dynamic Commodity Index Total Return, less expenses. The underlying index is comprised of 14 futures contracts, selected on a monthly basis from a universe of 27. Composition of the rules-based index in any given month will be determined quantitatively.<\/p>\n

Contrary to what you might have read, USCI is not an actively-managed ETF. The fund\u2019s composition is not determined by manager discretion. Instead, the holdings are determined by an index and remain static between monthly rebalancings. The prospectus (pdf) elaborates on the fact that no human bias is introduced into the process. Even its name clearly identifies this product as an \u201cindex\u201d fund.<\/p>\n

That said, the index is dynamic and its composition can change significantly from month to month. Quantitative dynamic indexes are nothing new. PowerShares pioneered their use in the ETF space, launching more than 40 funds using this concept beginning with the introduction of PowerShares Dynamic Market (PWC) in 2003. However, I believe USCI is the first time the concept has been used with a pure commodity ETF.<\/p>\n

The underlying index was developed by SummerHaven Index Management LLC and is based upon academic research by Yale University professors Gary B. Gorton and K. Geert Rouwenhorst, and Hitotsubashi University professor Fumio Hayashi. Much of the research behind the fund is documented in the 2004 paper titled \u201cFacts and Fantasies About Commodity Futures.\u201d The methodology employed by the index seeks to minimize the harmful effects of contango (negative roll-yield) by favoring commodities in backwardation (positive roll-yield) and longer term contracts.<\/p>\n

Each month 14 of the 27 eligible commodities are selected to be index components, with a minimum of one commodity from each sector (energy, grains, industrial metals, livestock, precious metals, and softs) to ensure diversification. The monthly commodity selection is a two-step process:<\/p>\n

    \n
  1. The seven commodities with the highest percentage price difference between the closest-to-expiration futures contract and the next closest-to-expiration futures are selected (the seven displaying the most backwardation).<\/li>\n
  2. From the remaining 20 eligible commodities, the seven with the highest one-year percentage price change are selected (the seven displaying the most one-year momentum). If all six sectors are not represented by at least one commodity, then a substitution process is employed until the constraint is satisfied.
    \nThe 14 selected commodities are included in the index for the next month on an equally-weighted basis. Due to the dynamic monthly commodity selection, the sector weights may vary from approximately 7% to 43% over time.<\/li>\n<\/ol>\n

    Selections are made on the fifth business day before the end of the calendar month. The rebalancing then occurs during the last four days of the month, with one-fourth of the required rebalancing taking place each day.<\/p>\n

    For the month of August 2010, the fund\u2019s sector allocation and component futures contracts are:<\/p>\n