It’s the first time the SEC has approved an ETF based solely on futures contracts. The other currently extant "commodity" ETFs traded in the US, covering gold (GLD and IAU) and the Euro (NYSEARCA:FXE) are based on physical holdings of their underlying components, despite the existence of deep and liquid futures markets. The SEC’s acceptance of the concept of futures-based ETFs potentially makes available a wide variety of "pure" commodity ETFs in future. The ETF was approved in less than seven months – the original S-1 registration statement was filed May 27 – which, by the SEC’s past record in approving unconventional ETFs, amounts to something faster than a speeding bullet. The most recent amendment was filed Oct. 26. The DB Commodity Tracking Index offers something close to genuinely diversified commodity exposure, with energy – in the form of crude oil (35%) and heating oil (20%) – accounting for just over half the base weights, compared with its 76% weighting in the more widely known and followed Goldman Sachs Commodity Index.
Among other widely-followed commodity indexes, both the Reuters-CRB Index (17.6%) and the Dow Jones-AIG Commodity Index (32.3%) carry lighter energy weightings, but neither has yet been proposed as the basis of an ETF.
The non-energy components of the DB product are aluminum (12.5%), representing industrial metals; gold (10%), representing precious metals; and corn and wheat, each weighted at 11.25%, representing the agricultural complex.
By contrast, the GSCI – which trades as futures and options on the Chicago Mercantile Exchange, and is available as an ETF in Europe – has 7.1% of its weighting in five industrial metals; 1.9% in two precious metals; and just under 15% in 11 agricultural and livestock contracts. Outside the energy complex, its largest individual commodity weighting is aluminum – heavily energy-influenced in its own right – at 2.86%.
Barclays Global Investors filed a registration statement for an ETF based on the GSCI on Jul. 22, and amended it as recently as Oct. 31. But the prospects for that product’s success are likely to have been seriously diluted by the DB ETF and its lighter exposure to the energy complex, where ETF investors can already choose among several equity-related instruments including the iShares Dow Jones energy sector fund (NYSEARCA:IYE), the energy SPDR (NYSEARCA:XLE) and the iShares Goldman Sachs Natural Resources Fund (NYSEARCA:IGN), itself more than 75% weighted to oil and oil services.
The DB Commodity Index Tracking Fund will charge a relatively lush, for an ETF, 1.45% annual fee, and pay additional brokerage and operating expenses expected to be 45 bps annually, not to mention the 3% upfront selling fee during the initial offering period. It is, however, expected to cover its annual fees with interest income with interest earned by investing funds not required for futures margining in high quality fixed income instruments.
It is not clear when the fund, which will trade on the American Stock Exchange under the symbol DBC, will float. Shares will go on sale at a base price of $25, with a minimum of 2 million shares, and a maximum of 60 million, in the initial offering. Each creation/redemption unit will consist of 200,000 shares.
One issue that Deutsche Bank will have to overcome is its lack of visibility in the ETF market, although the impending launch marks its return to the US ETF business. Its first, failed, pass came almost a decade ago, before ETFs were known as ETFs. In 1996, its Deutsche Morgan Grenfell subsidiary offered eight "country baskets" on the New York Stock Exchange, at about the same time that Morgan Stanley launched its WEBS (World Equity Benchmark Shares) on the Amex. While the DMG country baskets faded slowly away and were eventually delisted, the WEBS formed the basis of what is now the 27-member iShares MSCI series.
In its home territory, DB has also within the last year launched ETFs tracking the German benchmark DAX and the DJ Euro Stoxx 50. Trading on the Deutsche Börse, the DAX product trades around 10% of volume of the long-established IndexChange ETF, while its Stoxx product is one of six variants of that benchmark traded on that exchange.
Nit-picking: The - long, and liberally larded with legalese, which is the nature of the beast - DB Commodity Tracking Index registration statement is the best available source of information on the ETF. The statement says that pricing data will be available at http://www.dbcfund.db.com but that so far leads to an "Under Construction" page stating that the site "shall not constitute an offer to sell or the solicitation of an offer to buy nor shell [sic] there be any sale of these securities blah blah blah...". Likely to be of particular interest in the registration statement are Pages 29 and 30 showing, respectively:
- High and low index closing levels, annually from 1989 to 2003, and monthly for 2004 and through October 2005.
- A table of index commodity weights, again annually from 1989 to 2003, and monthly for 2004 and through October 2005.
I thought the SEC had got the message about the generally unhelpful nature of its pre-IPO restrictions on information flows, but I guess not.
That’s helpful: In researching this article, NakedShorts came across a Chicago Mercantile Exchange press release, issued Oct. 24, announcing revised GSCI weightings for 2006. Of its 610 words, almost 400 were of the "Goldman Sachs is a leading global investment banking…" type, along the usual disclaimers. Nowhere in the press release does it actually mention which commodity weights were changed. Duh and sheesh.
Disclosures & disclaimer
Index Universe, among its other interests, publishes the monthly newsletter Exchange-Traded Funds Report, to which NakedShorts – under his real name – is an occasional contributor.
Short CME. Still. Sigh.
Usual stuff about discussion of individual positions not being construed as investment advice unless you’re looking for carry-forward tax losses. Positions may change at any time without notice and probably will blah blah blah.
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