Excerpts from the Deutsche Bank Commodity Index ETF SEC Filing (DBC)

Dec.19.05 | About: PowerShares DB (DBC)

Here are some excerpts from the Deutsche Bank Commodity Index ETF SEC filing. This is worth reading; after all, when has the prospectus for any ETF or mutual fund contained the statement "You could lose all or substantially all of your investment"? The excerpts below focus on the ETF's focus, risks and tax treatment:

The Index is intended to reflect the performance of certain commodities. The commodities comprising the Index, or the Index Commodities, are Crude Oil, Heating Oil, Aluminum, Gold, Corn and Wheat. The notional amounts of each Index Commodity included in the Index are broadly in proportion to historic levels of the world's production and stocks of the Index Commodities...

  • Futures and forwards trading is volatile and highly leveraged and, as a result, even a small movement in market prices could cause large losses.
  • The success of the Master Fund's trading program will depend upon the skill of the Managing Owner and its trading principals.
  • You could lose all or substantially all of your investment.
  • Investors will pay fees in connection with their investment in Shares including asset-based fees of up to 1.45% per annum. Additional charges include brokerage fees and operating expenses expected to be approximately 0.45% per annum in the aggregate. The Fund is expected to earn interest income at an annual rate of 2.50% per annum. Consequently, it is expected that interest income will exceed fees.

The Shares are intended to provide investment results that generally correspond to the performance of the Index. Current information regarding the value of the Index is available on Reuters Page DBLCI, Bloomberg under the symbol DBLCMACL [Index] and on Deutsche Bank's website https://gm-secure.db.com/CommoditiesIndicies, or any successor thereto.

The estimated amount of all fees and expenses which are anticipated to be incurred by a new investor in Shares of the Fund during the first twelve months is 1.90% per annum of the net asset value. Interest income is expected to be approximately 2.50% per annum. Consequently, the Fund will break-even provided that it does not lose more than 0.60% per annum.

Index Composition

The Index is composed of notional amounts of each of the Index Commodities. The closing level of the Index is calculated by the Index Sponsor based on the closing price of the futures contracts for each of the Index Commodities and the notional amount of such Index Commodity. The Index includes provisions for the replacement of futures contracts as they approach maturity. This replacement takes place over a period of time in order to lessen the impact on the market for the futures contracts. Replacements occur monthly (other than in November) during the first week or so of a month in the case of the futures contracts relating to Crude Oil and Heating Oil. Replacement of the futures contracts for Aluminum, Gold, Corn and Wheat occurs when the Index is annually rebalanced.

The Index is rebalanced annually in November during the first week or so to ensure that each of the Index Commodities is weighted in the same proportion that such Index Commodities were weighted on December 1, 1988, or the Base Date. The following table reflects the index base weights, or Index Base Weights, of each Index Commodity on the Base Date:

Index Commodity Index Base Weight

Crude Oil 35.00
Heating Oil 20.00
Aluminum 12.50
Gold 10.00
Corn 11.25
Wheat 11.25
Closing Level on Base Date: 100.00

U.S. Shareholders

Treatment of the Master Fund Income

A partnership does not incur United States federal income tax liability. Instead, each partner of a partnership is required to take into account its share of items of income, gain, loss, deduction and other items of the partnership. Accordingly, each Shareholder will be required to include in income its allocable share of the Master Fund's income, gain, loss, deduction and other items for the Master Fund's taxable year ending with or within its taxable year. In computing a partner's United States federal income tax liability, such items must be included, regardless of whether cash distributions are made by the partnership. Thus, Shareholders may be required to include income without a corresponding current receipt of cash if the Master Fund generates taxable income but does not make cash distributions. The Master Fund's taxable year will end on December 31 unless otherwise required by law. The Master Fund will use the accrual method of accounting.

Fund Shareholders will take into account their share of ordinary income realized by the Master Fund from accruals of interest on Treasury Bills ("T-Bills") held in the Master Fund portfolio. The Master Fund may hold T-Bills with "original issue discount", in which case Fund Shareholders would be required to include accrued amounts in taxable income on a current basis even though receipt of those amounts may occur in a subsequent year. The Master Fund may also acquire T-Bills with "market discount." Upon disposition of such obligations, gain would generally be required to be treated as interest income to the extent of the market discount and Fund Shareholders would be required to include as ordinary income their share of such market discount that accrued during the period the obligations were held by the Master Fund.

The Code generally applies a "mark to market" system of taxing unrealized gains and losses on, and otherwise provides for special rules of taxation with respect to Section 1256 Contracts. A Section 1256 Contract includes certain regulated futures contracts and certain non-U.S. currency forward contracts. It is expected that the futures on the Index held by the Master Fund will constitute Section 1256 Contracts. Section 1256 Contracts held by the Master Fund at the end of a taxable year of the Master Fund will be treated for United States federal income tax purposes as if they were sold by the Master Fund at their fair market value on the last business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales (known as "marking to market"), together with any gain or loss resulting from any actual sales of Section 1256 Contracts (or other termination of the Master Fund's obligations under such contracts), must be taken into account by the Master Fund in computing its taxable income for the year. If a Section 1256 Contract held by the Master Fund at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on the sale will be adjusted to reflect the gain or loss previously taken into account under the mark to market rules.

Capital gains and losses from Section 1256 Contracts generally are characterized as short-term capital gains or losses to the extent of 40% of the gains or losses and as long-term capital gains or losses to the extent of 60% of the gains or losses. Gains and losses from certain non-U.S. currency transactions, however, will be treated as ordinary income and losses unless certain conditions are met. Thus, Shareholders of Fund will generally take into account their pro rata share of the long-term capital gains and losses and short-term capital gains and losses from Section 1256 Contracts held by the Master Fund. If a noncorporate taxpayer incurs a net capital loss for a year, the portion of the loss, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. A loss carried back to a year by a noncorporate taxpayer may be deducted only to the extent (1) the loss does not exceed the net gain on Section 1256 Contracts for the year and (2) the allowance of the carry-back does not increase or produce a net operating loss for the year.


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