New Commodity Indexes Attract Money

Chidem Kurdas

Commodity index funds that have greater flexibility as to the futures contracts they buy have gained traction with buyers of exchange-traded funds, to judge from the growth of PowerShares DB Commodity Index ETF.

The underlying index from Deutsche Bank allows investing in contracts further along the futures curve, to avoid losses from contango futures markets. The original, first-generation commodity indexes buy front or second month contracts, which are expensive in a contango. This causes built-in losses that can result in a negative return even when the underlying commodity markets are going up.

By correcting the problem, the second generation indexes get several percentage points of extra profit. Apparently investors are persuaded this is a good idea—-the PowerShares DB ETF has a market capitalization of  $6.25 billion, three to four times the assets of iShares S&P GSCI Commodity Index Trust, based on an earlier index.

A third-generation, even more flexible, methodology underlies the US Commodity Index Fund, which was launched more recently and has close to half-a-billion-dollars market cap. United States Commodity Funds chief investment officer John Hyland says they’re the first of this type but other third-generation funds will come out by the end of the year.    

The largest commodity ETF is State Street’s SPDR Gold Trust, with around $60 billion. It holds physical bullion, unlike diversified index funds, which use futures contracts.

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One Response to “New Commodity Indexes Attract Money”

  1. Commodities Follow Equity Index Precedent « HedgeFundSmarts Says:

    […] Third-generation commodity indexes follow the second generation versions, which do better than the older index funds by buying futures contracts further out on the curve, thereby avoiding losses due to contango markets. These have attracted investors. […]

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