This week Ben Shepherd wrote about a new ETF (electronically traded fund) from Summer Haven Index Management, LLC. It is The United States Metals Index (NYSE:USMI). It will be invested in 10 eligible metals futures contracts that are selected on a monthly basis based on quantitative formulas developed by SummerHaven Indexing. The eligible metals futures contracts that at any given time make up the Metals Index will vary in weighting based on a proprietary formula developed by SummerHaven relating to prices of the metals futures contracts. The fund is invested in a combination of industrial metals and precious metals.
Click periodic chart segment for larger image.
Shepherd had the following comments about the fund:
Each metal is assigned an equal base weight, and then those metals deemed to be in a low-inventory state are given an overweight allocation. The three metals exhibiting the greatest backwardation on the futures curve and the two displaying the greatest price momentum will have their weightings boosted 3 percent above their base allocation. The weightings for the remaining metals contracts will then each be reduced by 3 percent. The fund’s allocations will be rebalanced monthly.
The fund’s annual expense ratio is 0.70 percent, so it’s a fairly inexpensive option for gaining exposure to the entire metals complex in a single shot. The one potential drawback is that it’s structured as a commodity pool, which means investors will receive a K-1 form at tax time. Although a K-1 is not as complicated as some might assume, many investors avoid securities that require them.
Here is the description summary of the fund from the sponsor:
The investment seeks to replicate, net of expenses, the SummerHaven Metals Index Total Return. The index is designed to reflect the performance of a diversified group of metals. It is owned and maintained by SummerHaven Index Management, LLC (SummerHaven Indexing) and calculated and published by the NYSE Arca. The fund seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Metals Futures Contracts.
The fact sheet states that the Metals Index attempts to maximize backwardation and minimize contango while using contracts in the liquid portions of the futures curve. The fund will use futures contracts available in U.S. and UK markets and may also utilize swaps. The portfolio will be collateralized by cash, cash equivalents and U.S. government obligations with remaining maturities of two years or less. The sponsor expects that 5% to 30% of the assets normally will be committed to margin requirements for contracts held. At times margin may fall outside this specified range.
The fund does not intend to take physical delivery of metals but cannot exclude the possibility that might happen.
The initial expenses for the fund are set at 0.70% per annum, but may be increased to 0.95% after 31 March 2013.
The ten metals that can be included in the fund are listed in the two tables shown below (from the Prospectus):
The term tenor refers to the contract time duration.
The prospectus indicates the composition of SDMI as of December 21, 2012 is 43% precious metals and 57% industrial metals.
The hypothetical return for the index as shown in the prospectus is given in the graphic below below:
Hypothetical performance compared to other indexes (from prospectus):
We can only hope that the fund managers can pay better attention to their portfolio management than they did to the mislabeling of the above graph as a five year comparison.
The full prospectus can be reviewed here.
This fund bears watching.
New ETFs: Metals and MLPs by Ben Shepherd