Hougan cautioned that this latest product iteration doesn't assure profitability. "There always can be market shocks that can cause both spot and contract prices to move sharply against investors," he said. And he noted that screening for spreads can reduce commodity diversification, which is a portfolio characteristic considered essential for mitigating volatility, and which is an underlying argument for owning exchange-traded products.
Developers of these products are betting their increased selection conviction will likely produce outperformance, Hougan said, which justifies to them the creation of portfolios that ostensibly appear riskier than traditional commodity portfolios.
Others, such as Adam de Chiara, co-president of Jeffries Asset Management, are concerned that rules-based active management resembles active portfolio management, but without the attention paid to risk that a hands-on manager can bring to a portfolio. "There are formulas that may say, 'look, oil is in steep contango so maybe we should own less of it,'" he said. "But I don't know a formula that can respond to a second hurricane heading to the Gulf of Mexico or when geopolitical tensions explode in Iran."
Still, USCI's Hyland believes his third generation fund is a sign of things to come. He said he thinks the major index providers--Dow Jones, UBS, S&P, and GSCI--will start offering variations of their static portfolios based on strategy rotation that will shift commodity weightings and positions on the roll yield curve. "That will be the future of indexing," he asserted.
--Eric Uhlfelder