USCI United States Commodity Index Fund

Alameda, California based United States Commodity Funds LLC is a privately owned Asset Management Company and one of the leading providers of commodity ETFs. The $ 3.39 billion asset under management firm has recently made the eleventh addition to its product portfolio in the commodity ETF space by introducing the United States Agricultural Index Fund (USAG).

The firm caters to investors looking for exposure in commodities with products ranging from individual commodity funds targeting natural gas, heating oil, gasoline, crude oil, as well as a broader market commodity fund (USCI). However, USAG will be their first step in the broad agricultural commodity space (read Is USCI The Best Commodity ETF?).

Commodity ETF Investing

Commodity ETFs have had a slightly disappointing picture over the past quarter given the global economic and political pressures. Issues pertaining to global economic growth, political drama in Iran over crude oil, dollar strengthening against other major currencies, and the debt crisis in Greece are some of the factors that were responsible for pushing commodity prices lower, thereby resulting in the dismal performance of commodity ETFs in the time period (read Three Commodity ETFs That Have Not Surged).

However, agricultural commodities are a different story. It has little or no correlation with the above mentioned economic and political factors. Moreover, most of the agricultural products like wheat, cotton, coffee, sugar etc. are necessities and the demand for which are never going to fade away. Given the optimistic premise, let’s have a closer look at the brand new agricultural commodity ETF from USCF:

USAG In Focus

The ETF will look to replicate the daily yield performance of its units’ Net Asset Value with that of the daily yield performance of the SummerHaven Agriculture Index Total Return, before adjusting for fees and expenses of the fund. Futures contracts for the agricultural commodities comprising the Agriculture Index can be considered to be highly liquid and regulated as these contracts are continuously traded on ICE Futures US, ICE Futures Canada, the Chicago Board of Trade, the Kansas City Board of Trade and the Chicago Mercantile Exchange.

At any given time the fund invests in future contracts of 14 commodities listed in the index. The weightings of those 14 futures contracts are revalued and rebalanced on a monthly basis. The commodities are initially assigned a base weight on factors such as marketability and overall economic impact of a particular commodity. The initial weights that are assigned to individual commodities serves as a reference for future weight calculations corresponding to the index by applying some quantitative formulas developed by SummerHaven relating to the current prices of futures contracts. The weights then decide the composition of assets in the fund and the performance of the fund varies accordingly.

According to ETF Daily News, the index overweighs the components that are assessed to be in a low inventory state and underweighs the components assessed to be in a high inventory state. The explanation for this is that it results in lower contango for the underlying commodities and low inventory products tend to perform better due to worries over supplies. Unfortunately, investors have to pay for this unique methodology, as the current management fee for the product comes in at 95 basis points a year (see Inside The FlexShares Natural Resource ETF).

Competition

The newly launched ETF will definitely serve as a niche product as it will cater to the investors looking to get exposure in the broader commodity space and not just particular commodity specific funds. While most of the funds in this space are commodity specific products such as-- UBC, CORN, GRU-- USAG may face severe competition from PowerShares DB Agriculture Fund (DBA) and E-TRACS UBS Bloomberg CMCI Agriculture ETN (UAG), two very impressive agriculture-focused ETPs.

DBA holds all of its assets in widely traded and highly liquid commodity futures. It has an expense ratio of 0.85% compared to a category average of 0.92% and total assets worth an impressive $ 2.09 billion. Similarly, UAG also holds all of its assets in 12 agricultural commodity futures contracts, representing 12 of the most liquid contracts. The fund charges a mere 65 basis points for fees and expenses which is one of the lowest in this category. The fund was launched in the year 2008 and since then it has managed $ 13.98 million in its total assets (see IndexIQ Files For Industry First Diamond ETF).

Given the above numbers, it is prudent to think that USAG could see huge inflows in its asset base. The product will remain highly in demand as the investors clearly have an interest in ag commodity products but the options are still limited. One of the major drawbacks of the product is that it is comparatively expensive to its counterparts. Yet, with a proactive management technique, and asset selection based on proven mathematical research, the fund could have a bright future, much like its counterpart, USCI.

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