ETF Talk

Reducing ‘Contango’ through a Commodities Fund

Based on its name, the United States Commodity Index Fund (USCI) seems to be just another broad play on the commodities sector, but the fund is actually much more than that.

USCI has been referred to as the “ultimate contango killer” fund. Contango, according to Investopedia, occurs when investors are willing to pay more for a commodity via futures contracts than the commodity is expected to be worth at that time in the future.

Investors who are long in commodities, or have a long time horizon, can be in trouble when this occurs, since a futures contract would have to fall in price to match the expected actual, or spot, price of the commodity in question. As a general rule, investors want futures contracts to rise in value, not decline.

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