A new futures-based metals fund gives investors a new way to access the global development story.
United States Commodity Funds, the Alameda, Calif.-based firm behind the $1.19 billion U.S. Oil Fund (USO), today launched the first broad futures-based metals fund that holds everything from gold to industrial metals such as copper or lead.
The United States Metals Fund (USMI), which comes with an all-in annual cost of about 0.90%, is breaking new ground in combining precious metals and industrial metals into one security that’s futures-based. Its management fee is 70 basis points, while trading commissions will max out at 5 basis points and "other" expenses won’t exceed 15 basis points, the company said.
To date, most metals ETFs have been physical funds and focused on precious metals. iPath, the ETN provided backed by Barclays Plc, offers a slew of individual metals ETNs, and a pair of broader securities that are focused on industrial and precious metals separately. Also, ETF Securities has a number of futures-based ETFs -- including some focused on metals -- in registration with U.S. Securities regulators.
The fund will allow investors broad exposure to a variety of metals that are crucial to infrastructure development. Indeed, even some of the precious metals such as silver, platinum and palladium, have clear industrial uses, giving the fund’s precious metals components arguably utilitarian aspects that are tied into the broad global development story emanating largely from the emerging markets.
The fund has 10 eligible metals, which will be assigned a weight based on an assessment of market liquidity and the metal’s overall economic importance. Those metals, which have to be traded on major U.S. or Canadian exchanges, are:
- Primary aluminum
The weightings of the metals are all determined by the SummerHaven Dynamic Metals Index Total Return, a rules-based benchmark created by the firm that is behind a number of funds at United States Commodity Funds.
The index is what John Hyland, the chief investment officer of United States Commodity Funds, likes to call third generation futures indexes. "The Metals Index attempts to maximize backwardation and minimize contango while using contracts in the liquid portions of the futures curve," the company said about the fund’s strategy on its website.
Contango, also referred to as a "normal futures curve," is when the front-end months on the futures curve are cheaper than contracts expiring in later months, making rolling into the next, pricier position before expiration of a given contract a money-losing proposition each time. Backwardation is the opposite, meaning the so-call roll yield becomes positive each time contract exposure is shifted, allowing a fund to pick up extra returns.
The portfolio consists of listed metals futures contracts and other metals-related futures and may consist of forwards and swap contracts. These investments will be collateralized by cash, cash equivalents and U.S. government obligations with remaining maturities of two years or less.
The company noted that at the end of May it cut the management fee component of USMI’s annual expense ratio to 0.70% from 0.95%.
It said it anticipates the waiver will remain in place through March 31, 2013. The arrangement is voluntary, however, and may be terminated or modified prior to March 31, 2013, with the approval of the company’s board.