Backwardation and beyond


USCF lists complex backwardation-targeting commodity ETF

Commodity ETF specialist USCF is listing a new broad-based commodity ETF that is based on the straightforward idea that commodities that are in low supply will outperform those that are in abundance. They’ll do this because low supply tends to drive commodity futures markets into backwardation. (Backwardation is where a commodity’s futures contract is cheaper than its spot price)


The USCF ETF TR Commodity Strategy ETF (SDCI) will be “based on the notion that commodities with low inventories tend to outperform commodities with high inventories,” the prospectus says. And, in reverse, that “priced-based measures can be used to help assess the current state of commodity inventories.”


To do this, SDCI will track the SummerHaven Dynamic Commodity Index Total Return Index. The index is built out of 14 commodities selected from the list of 27 below.

  • Energy – crude oil (Brent), crude oil (WTI), gas oil, heating oil, natural gas, and unleaded gasoline;
  • Precious Metals – gold, silver, and platinum;
  • Industrial Metals – zinc, nickel, aluminum, copper, lead, and tin;
  • Grains – soybean oil, wheat, corn, soybeans, and soybean meal;
  • Softs – sugar, cotton, coffee, and cocoa; and
  • Livestock – live cattle, lean hogs, and feeder cattle.

The 14 commodities are chosen using a three-step process. First, the seven commodities with the least contango/most backwardation are identified. Second, from the remaining 20 eligible commodities, the seven commodities with the greatest percentage price change over the prior 12-month period are identified. If any of the six categories is totally unrepresented, the commodity for the omitted sector with the greatest momentum is substituted for the commodity identified during the second step with the lowest momentum, the prospectus says. Third, from the eligible futures contract for each of the 14 identified commodities, the futures contract with the greatest backwardation (or least contango).


The 14 chosen ones are then equally weighted by notional amount. The futures can be listed on the exchange of any rich country – although one imagines they will mostly be taken from Chicago.


Analysis – how do you have a total return commodity index?

Like other total return commodity indexes, this one will reflect “performance of a fully margined and collateralized portfolio of exchange-traded commodities futures contracts,” the prospectus says.


But what’s that? In simpler English, when traders buy and sell commodity futures they never pay cash in full. Instead, they deposit a small margin, usually 5 – 10% of the value of the futures contract, while holding the rest in cash/treasuries as collateral.


This allows traders to be exposed to the underlying commodity, while receiving a return on the rest of their capital. The collateral also satisfies the exchange that come delivery, the trader can cough up for the commodity futures.



More exchange-traded bonds from XTB

XTB, the Aussie ETF issuer (sort of) that puts the corporate bonds of single companies on exchange, is adding to its corporate bond arsenal. XTB is putting four more corporate bonds on the ASX, from Dexus, Ausnet, Telstra, Vicinity Centres Trust.







Perennial lists ETMF

Sydney-based Perennial Value Management has listed a new ETMF that aims to provide a tax-efficient income stream. The elnvest Income Generator Fund (EIGA) will be based off one of the companies wholesale funds, the Perennial Value Shares for Income Trust (PERVHYD), the company said in a statement. PERVHYD has underperformed the index by almost 20% over the past five years.


Perennial were contacted for comment.