The Academic Commodity ETF
This broad-basket commodity exchange-traded fund uses market-price signals to construct its index--with mixed results.
Strategies that eschew traditional market-cap weighting are the current trend in exchange-traded funds. Funds that use fundamental indexing or other rules-based weighting methodologies are popping up in almost every sector. In the commodities space, there's United States Commodity Index (USCI), which launched in 2010 and uses market-price signals to construct its index. Most commodity indexes weight by consumption or production, but USCI's strategy is based on research by academics Geert Rouwenhorst and Gary Gorton. In a 2007 paper, Rouwenhorst and Gorton found that the futures contracts of commodities with low inventory consistently outperformed those of commodities with high inventory. They also found that selecting commodities for momentum, a risk factor that has garnered increased interest in recent years, boosts return. The index that USCI tracks seeks to capitalize on these observations, but the fund's live performance record has been below average compared with other broad-basket commodity ETFs since inception through the end of August.
It may be that the excess return generated by this fund's strategy can't be harnessed in a cost-effective way. USCI's expense ratio is 0.95%, and the fund incurs additional costs from brokerage fees. Investors can expect to pay up to 1.17% a year, which makes USCI the most expensive commodity exchange-traded product in an already-expensive space. The fund's estimated holding cost, which takes additional fees and tracking error into account, is 1.32% a year. This high cost can quickly eat into any excess return.
Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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