Calling it a “second-generation” commodity product, the fund is designed to reduce the potential negative effects of contango that can significantly reduce the performance of commodity investments over time, according to a press release. The passively managed Van Eck CM Commodity Index Fund seeks to track, before fees and expenses, the performance of UBS Bloomberg Constant Maturity Commodity Total Return Index (CMCI).
The Index was designed to minimize investment exposure to the front end of the futures curve and diversifies exposure across maturities. By diversifying exposure across multiple maturities, the Index seeks to mitigate the impact of contango.
The press release explained that contango occurs when the price of a futures contract exceeds the expected spot price at contract expiration. In contango, when futures prices are falling, the seller benefits. Conversely, backwardation occurs when the price of a futures contract is below the expected spot price at contract expiration. In this scenario, when futures prices are rising, the buyer benefits. Roll yield is the amount of return generated during periods of backwardation, while negative roll yield refers to the amount of return lost during periods of contango.The CMCI is diversified across 26 commodities and five maturities, and is rebalanced monthly to reduce the risk of overconcentration in any one commodity. The CMCI is diversified along the entire curve and uses a continuous roll.