United States Commodity Funds filed paperwork with the SEC for a United States Metal Index Fund. The prospectus notes (USMI) as its proposed trading symbol. The Metals Index is a metal sector index designed to broadly represent industrial and precious metals while overweighting the components that are assessed to be in a low inventory state and underweighting the components assessed to be in a high inventory state.
The Metals Index consists of ten metals — six base metals and four precious metals. The base metals are aluminum, copper, zinc, nickel, tin, and lead. The precious metals are gold, silver, platinum, and palladium. Each metal is assigned a base weight based on an assessment of market liquidity and the metal’s overall economic importance.
Academic research by Professors Gorton, Rouwenhorst and Hayashi has shown that commodities in relatively low inventory states tend to have higher returns than commodities in relatively high inventory states. Furthermore, relative inventory comparisons can be estimated by the price-based signals momentum and basis. Momentum is the percentage price change in a commodity over the previous year. Basis is the annualized percentage difference between the nearest-to-maturity contract and the second nearest-to-maturity contract. Using these price-based signals, metals determined to be in low inventory state will be weighted more heavily, and metals in high inventory state will be weighted less heavily during any given month.
The Metals Index is rules-based and is rebalanced monthly based on observable price signals described above. In this context, the term “rules-based” is meant to indicate that the composition of the Metals Index in any given month will be determined by quantitative formulas relating to the prices of the futures contracts that relate to the commodities that are included in the Metals Index. Such formulas are not subject to adjustment based on other factors.
The overall return on the Metals Index is generated by two components: (i) uncollateralized returns from the Benchmark Component Metals Futures Contracts comprising the Metals Index, and (ii) a daily fixed income return reflecting the interest earned on a hypothetical 3-month U.S. Treasury Bill collateral portfolio, calculated using the weekly auction rate for the 3-Month U.S. Treasury Bills published by the U.S Department of the Treasury. SummerHaven Indexing is the owner of the Metals Index.
USMI seeks to achieve its investment objective by investing in Benchmark Component Metals Futures Contracts and Other Metals-Related Investments such that daily changes in USMI’s NAV will closely track the daily changes in the Metals Index. USMI’s positions in Metals Interests will be rebalanced on a monthly basis in order to track the changing nature of the Metals Index. In order that USMI’s trading does not unduly cause extraordinary market movements, and to make it more difficult for third parties to profit by trading based on market movements that could be expected from changes in the Benchmark Component Metals Futures Contracts, USMI’s investments typically will not be rebalanced entirely on a single day, but rather will typically be rebalanced over a period of four days. After fulfilling the margin and collateral requirements with respect to its Metals Interests, the Sponsor will invest the remainder of USMI’s proceeds from the sale of baskets in Treasury Securities or cash equivalents, and/or merely hold such assets in cash (generally in interest-bearing accounts).
USMI anticipates that to meet its investment objective it will invest first, in the current Benchmark Component Metals Futures Contracts and, thereafter, to comply with regulatory requirements or in view of market conditions, in Other Metals-Related Investments intended to replicate the return on the Benchmark Component Metals Futures Contracts, including cleared swap contracts and other over-the-counter transactions. For more information on the composition of the Metals Index and selection of the Benchmark Component Metals Futures Contracts, see the section of this prospectus entitled “What is the Metals Index?”
For the full prospectus click: HERE
Related ETFs: United States Oil (NYSE:USO), United States Natural Gas (NYSE:UNG), United States Commodity Index (NYSE:USCI)