United States Commodity Funds, deepening its indexing relationship with SummerHaven Investment Management, filed with securities regulators to register three new contango-controlling ETFs, one based on a mix of precious and industrial metals, one based on copper and the other based on agricultural products.

The new offerings build on its United States Commodity Index Fund (NYSEArca: USCI), an ETF launched in summer. USCI is designed to minimize the deleterious effects of contango, a condition in futures markets when contracts with further-out expiration dates cost more than those with nearer expiration dates. It erodes fund returns because managers have to pay up when they “roll” positions from expiring contracts to later-month ones to maintain exposure.

The proposed new funds, which will be listed on Arca, the New York Stock Exchange’s electronic trading platform, include:

• The United States Metals Index Fund
• The United States Copper Index Fund
• The United States Agriculture Index Fund

The three funds will be based on the SummerHaven Dynamic Metals Index, SummerHaven Copper Index and SummerHaven Dynamic Agriculture, according to the S-1 filing.

U.S. Commodity Funds didn't specify ticker symbols or expense ratios in the filing.

Contango-Killing Indexes

The precious metals ETF will invest in futures contracts for metals that are traded on the NYMEX, LME, COMEX or on other foreign exchanges, while the agriculture fund will buy futures on the ICE, CBOT, CME, Kansas City Board of Trade (“KCBT”) or on other foreign exchanges, the filing said.

The SummerHaven Copper Index is made up of COMEX high-grade copper futures contracts with maturities of 18 months or less, and maintains positions in liquid portions of the copper futures curve, the company said in a press release early in November.

Through use of fundamental signals about the underlying physical copper market, the index weights its composition to closer-to-maturity contracts in backwardated markets and shifts to longer-duration contracts when markets are in contango.

"We believe based on our research that a properly constructed single-commodity index, one that dynamically adjusts its weightings along the investable futures curve, can produce results over time that exceed the results from a traditional static index while displaying the same, or less, volatility," SummerHaven Partner and Index Researcher Adam Dunsby said in the statement.

The methodology behind the SummerHaven Dynamic Metals Index (“SDMI”) and the SummerHaven Dynamic Agriculture Index (“SDAI”) is simple: The bigger the physical inventory of a commodity, the smaller the weight that commodity will carry in the mix. The indexes will be rebalanced monthly.

“Recent academic research has shown that commodities with low inventories tend to outperform commodities with high inventories over time,” SummerHaven said in a separate press release in September.

Rouwenhorst And Gorton

The underpinning of what SummerHaven and United States Commodity Funds are up to is based in part on research into commodities conducted by SummerHaven Co-Founder and Director of Research Geert Rouwenhorst.

“The fund basically takes the view that if investors want to be long commodities, the research has shown that expected returns are higher if you concentrate the portfolio in the backwardated portion, or at the least-contango portion of the commodities space,” Rouwenhorst said in a telephone interview in August.

Rouwenhorst, also a professor at Yale University, is best known for a paper co-authored earlier this decade with Gary Gorton, Facts and Fantasies about Commodity Futures, which kicked off the surge of commodity investing seen in the past five years. Gorton acts as a senior adviser to SummerHaven.

In the paper, Gorton and Rouwenhorst showed that an investment in a diversified commodity index over a 50-year period would have seen positive returns that were also negatively correlated to stocks and bonds.