All of the notes are based on DJ-AIG commodity indexes. The indexes track the performance of a fully collateralized rolling futures position, as do most existing commodity products (ETFs, mutual funds, etc.). This performance differs from the change in the spot price of each commodity or set of commodities, as it incorporate the roll yield and collateral interest from the futures investment. (For a detailed explanation of how this works, see this article covering a filing for a natural gas ETF.)
The new ETNs in registration are:
• DJ-AIG Agriculture
• DJ-AIG Energy
• DJ-AIG Ex-Energy
• DJ-AIG Grains
• DJ-AIG Industrial Metals
• DJ-AIG Livestock
• DJ-AIG Petroleum
• DJ-AIG Precious Metals
• DJ-AIG Softs
The prospectus is available here.
ETNs are debt instruments that trade like stock. Similar in many ways to exchange-traded funds (ETFs), ETNs have certain important tax and tracking advantages, although they may also have additional risks. The key differentiator lies in the taxation: Based on current opinion, all gains on ETNs held for longer than one year are treated as long-term capital gains. By contrast, investors who hold futures-based ETFs must pay taxes on all gains each year, even if they never sell the fund. These gains are treated 60% as long-term gains and 40% as short-term gains.
A full comparison of ETFs and ETNs is available here.
The new ETNs will challenge the PowerShares DB family of commodity ETFs. PowerShares launched seven sector-based commodity ETFs in January of this year, the most successful of which, the PowerShares DB Agricultural Portfolio (AMEX: DBA), now has over $330 million in assets. Both the ETNs and the PowerShares ETFs charge 0.75% in expenses. The PowerShares products use a quantitative strategy in an attempt to maximize the “roll yield” and minimize the impact of “contango” on performance.
More: For the currently available products, see Commodity ETFs and ETNs.