Market Overview

Four Contango-Killing ETFs

The specter of contango must be acknowledged when it comes to commodities ETFs, particularly those that are based on futures contracts, not actual physical holdings of an underlying commodity. And since basically all of the ETFs backed by physical commodities are found in the precious metals universe, investors could encounter with dozens of other funds without even knowing.

Simply put, the concept of contango is defined as the scenario where the near-month futures contract for a given commodity is trading at a discount to the contracts that further out. Contango is the situation that has plagued ETFs such as the U.S. Oil Fund (NYSE: USO) and the U.S. Natural Gas Fund (NYSE: UNG), leading to returns that can lag the underlying commodity, particularly in the case of USO.

Investors looking for commodities exposure with minimal impact from contango would do well to check out the following ETFs.

1) Teucrium WTI Crude Oil Fund (NYSE: CRUD): Our preference would be that CRUD tracked Brent crude rather than West Texas Intermediate, but since that's not the case, it's still worth noting that CRUD has outperformed USO by a decent margin in the past three months. Thinly traded, CRUD holds futures contracts from multiple months, unlike USO, which focuses on the near-month contract. That forces USO to roll contracts every month.

CRUD also deserves some credit for fighting backwardation, the reverse of contango where the near-month contracts trade at higher prices as they near expiration compared to the longer-dated contracts.

2) Teucrium Corn Fund (NYSE: CORN): Just over a year old, CORN has become the go-to ETF for investors looking for corn exposure without the need for a futures account. Using the same backwardation/contango fighting approach as CRUD, 35% of CORN's weight is allocated to the second-to-expire CBOT corn futures contract, 30% goes to the third-to-expire contract and the remaining 35% goes to the December contract. CORN has raked in over $131.3 million in assets under management since its 2010 debut.

3) U.S. 12 Month Oil Fund (NYSE: USL): Like USO, USL does offer exposure to the near-month WTI crude contract, but with a positive twist. USL mixes in contracts from the next 11 months, substantially reducing the need to roll a large amount of contracts every month. That cuts down on the investor's expenses and has probably helped USL outperform USO over the past six months. Investors should note that when USL calculates the average daily movement of the 12 oil contracts it holds, each contract is equally weighted.

4) U.S. Commodity Index Fund (NYSE: USCI): USCI is worth a look for a couple of different reasons. First, the ETF offers exposure to different commodities every month by selecting seven from a basket of 27. The seven with the most moderate contango situations are selected for inclusion. The remaining commodities are then ranked by price increase over the past year, regardless of whether the related futures market is backwardated or contangoed and the seven commodities with the best performance over the last year are included to round out the index, according to ETFdb.com.

Posted-In: Long Ideas News Short Ideas Specialty ETFs New ETFs Futures Commodities Intraday Update

 

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