United States Commodity Index Funds Trust - Quarter Report: 2013 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2013. |
OR
| ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . |
Commission File Number: 001-34833
United States Commodity Index Funds Trust
(Exact name of registrant as specified in its charter)
| Delaware | 27-1537655 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1999 Harrison Street, Suite 1530
Oakland, California 94612
(Address of principal executive offices) (Zip code)
(510) 522-9600
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | x | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
UNITED STATES COMMODITY INDEX FUNDS TRUST
| Page | ||
| Part I. FINANCIAL INFORMATION | ||
| Item 1. Condensed Financial Statements. | 1 | |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 47 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 118 | |
| Item 4. Controls and Procedures. | 119 | |
| Part II. OTHER INFORMATION | ||
| Item 1. Legal Proceedings. | 119 | |
| Item 1A. Risk Factors. | 119 | |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 119 | |
| Item 3. Defaults Upon Senior Securities. | 119 | |
| Item 4. Mine Safety Disclosures. | 119 | |
| Item 5. Other Information. | 119 | |
| Item 6. Exhibits. | 120 |
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
Index to Condensed Financial Statements
| Documents | Page | |
| Condensed Statements of Financial Condition at June 30, 2013 (Unaudited) and December 31, 2012 | 2 | |
| Condensed Schedules of Investments (Unaudited) at June 30, 2013 | 7 | |
| Condensed Statements of Operations (Unaudited) for the three and six months ended June 30, 2013 and 2012 | 12 | |
| Condensed Statements of Changes in Capital (Unaudited) for the six months ended June 30, 2013 and Condensed Statements of Changes in Units Outstanding (Unaudited) for the six months ended June 30, 2013 | 17 | |
| Condensed Statements of Cash Flows (Unaudited) for the six months ended June 30, 2013 and 2012 | 22 | |
| Notes to Condensed Financial Statements for the period ended June 30, 2013 (Unaudited) | 27 |
| 1 |
United States Commodity Index Funds Trust
Condensed Statements of Financial Condition
At June 30, 2013 (Unaudited) and December 31, 2012
United States Commodity Index Fund
| June 30, 2013 | December 31, 2012 | |||||||
| Assets | ||||||||
| Cash and cash equivalents (Notes 2 and 6) | $ | 451,753,095 | $ | 430,800,077 | ||||
| Equity in Newedge trading accounts: | ||||||||
| Cash and cash equivalents | 73,665,287 | 60,319,627 | ||||||
| Unrealized loss on open commodity futures contracts | (27,244,492 | ) | (5,220,900 | ) | ||||
| Receivable for units sold | – | 2,922,886 | ||||||
| Interest receivable | 1,261 | 474 | ||||||
| Other assets | 30,166 | 4,657 | ||||||
| Total assets | $ | 498,205,317 | $ | 488,826,821 | ||||
| Liabilities and Capital | ||||||||
| Management fees payable (Note 4) | $ | 396,241 | $ | 394,233 | ||||
| Professional fees payable | 147,725 | 312,296 | ||||||
| Brokerage commissions payable | 22,815 | 22,815 | ||||||
| Other liabilities | 15,371 | 11,750 | ||||||
| Total liabilities | 582,152 | 741,094 | ||||||
| Commitments and Contingencies (Notes 4, 5 and 6) | ||||||||
| Capital | ||||||||
| Sponsor | – | – | ||||||
| Unitholders | 497,623,165 | 488,085,727 | ||||||
| Total Capital | 497,623,165 | 488,085,727 | ||||||
| Total liabilities and capital | $ | 498,205,317 | $ | 488,826,821 | ||||
| Units outstanding | 9,300,000 | 8,350,000 | ||||||
| Net asset value per unit | $ | 53.51 | $ | 58.45 | ||||
| Market value per unit | $ | 53.50 | $ | 58.63 | ||||
See accompanying notes to condensed financial statements.
| 2 |
United States Commodity Index Funds Trust
Condensed Statements of Financial Condition
At June 30, 2013 (Unaudited) and December 31, 2012
United States Copper Index Fund
| June 30, 2013 | December 31, 2012 | |||||||
| Assets | ||||||||
| Cash and cash equivalents (Notes 2 and 6) | $ | 1,775,625 | $ | 2,109,061 | ||||
| Equity in Newedge trading accounts: | ||||||||
| Cash and cash equivalents | 528,732 | 432,529 | ||||||
| Unrealized gain (loss) on open commodity futures contracts | (208,250 | ) | 6,575 | |||||
| Receivable from Sponsor (Note 4) | 47,990 | 96,364 | ||||||
| Interest receivable | 25 | 18 | ||||||
| Other assets | 144 | 29 | ||||||
| Total assets | $ | 2,144,266 | $ | 2,644,576 | ||||
| Liabilities and Capital | ||||||||
| Management fees payable (Note 4) | $ | 1,173 | $ | 1,393 | ||||
| Professional fees payable | 49,758 | 100,193 | ||||||
| Other liabilities | 51 | 44 | ||||||
| Total liabilities | 50,982 | 101,630 | ||||||
| Commitments and Contingencies (Notes 4, 5 and 6) | ||||||||
| Capital | ||||||||
| Sponsor | – | – | ||||||
| Unitholders | 2,093,284 | 2,542,946 | ||||||
| Total Capital | 2,093,284 | 2,542,946 | ||||||
| Total liabilities and capital | $ | 2,144,266 | $ | 2,644,576 | ||||
| Units outstanding | 100,000 | 100,000 | ||||||
| Net asset value per unit | $ | 20.93 | $ | 25.43 | ||||
| Market value per unit | $ | 21.10 | $ | 25.01 | ||||
See accompanying notes to condensed financial statements.
| 3 |
United States Commodity Index Funds Trust
Condensed Statements of Financial Condition
At June 30, 2013 (Unaudited) and December 31, 2012
United States Agriculture Index Fund
| June 30, 2013 | December 31, 2012 | |||||||
| Assets | ||||||||
| Cash and cash equivalents (Notes 2 and 6) | $ | 1,949,640 | $ | 2,000,438 | ||||
| Equity in Newedge trading accounts: | ||||||||
| Cash and cash equivalents | 450,211 | 679,407 | ||||||
| Unrealized loss on open commodity futures contracts | (65,745 | ) | (119,155 | ) | ||||
| Receivable from Sponsor (Note 4) | 60,094 | 76,851 | ||||||
| Interest receivable | 46 | 32 | ||||||
| Other assets | 142 | – | ||||||
| Total assets | $ | 2,394,388 | $ | 2,637,573 | ||||
| Liabilities and Capital | ||||||||
| Management fees payable (Note 4) | $ | 1,578 | $ | 1,772 | ||||
| Professional fees payable | 61,902 | 80,030 | ||||||
| Other liabilities | 87 | 79 | ||||||
| Total liabilities | 63,567 | 81,881 | ||||||
| Commitments and Contingencies (Notes 4, 5 and 6) | ||||||||
| Capital | ||||||||
| Sponsor | – | – | ||||||
| Unitholders | 2,330,821 | 2,555,692 | ||||||
| Total Capital | 2,330,821 | 2,555,692 | ||||||
| Total liabilities and capital | $ | 2,394,388 | $ | 2,637,573 | ||||
| Units outstanding | 100,000 | 100,000 | ||||||
| Net asset value per unit | $ | 23.31 | $ | 25.56 | ||||
| Market value per unit | $ | 23.89 | $ | 25.59 | ||||
See accompanying notes to condensed financial statements.
| 4 |
United States Commodity Index Funds Trust
Condensed Statements of Financial Condition
At June 30, 2013 (Unaudited) and December 31, 2012
United States Metals Index Fund
| June 30, 2013 | December 31, 2012 | |||||||
| Assets | ||||||||
| Cash and cash equivalents (Notes 2 and 6) | $ | 1,814,584 | $ | 2,136,984 | ||||
| Equity in Newedge trading accounts: | ||||||||
| Cash and cash equivalents | 558,176 | 468,065 | ||||||
| Unrealized gain (loss) on open commodity futures contracts | (258,874 | ) | 46,058 | |||||
| Receivable from Sponsor (Note 4) | 60,068 | 59,316 | ||||||
| Interest receivable | 11 | 7 | ||||||
| Other assets | 149 | – | ||||||
| Total assets | $ | 2,174,114 | $ | 2,710,430 | ||||
| Liabilities and Capital | ||||||||
| Management fees payable (Note 4) | $ | 1,284 | $ | 1,581 | ||||
| Professional fees payable | 61,902 | 61,605 | ||||||
| Other liabilities | 73 | 67 | ||||||
| Total liabilities | 63,259 | 63,253 | ||||||
| Commitments and Contingencies (Notes 4, 5 and 6) | ||||||||
| Capital | ||||||||
| Sponsor | – | – | ||||||
| Unitholders | 2,110,855 | 2,647,177 | ||||||
| Total Capital | 2,110,855 | 2,647,177 | ||||||
| Total liabilities and capital | $ | 2,174,114 | $ | 2,710,430 | ||||
| Units outstanding | 100,000 | 100,000 | ||||||
| Net asset value per unit | $ | 21.11 | $ | 26.47 | ||||
| Market value per unit | $ | 20.74 | $ | 31.07 | ||||
See accompanying notes to condensed financial statements.
| 5 |
United States Commodity Index Funds Trust
Condensed Statements of Financial Condition
At June 30, 2013 (Unaudited) and December 31, 2012
United States Commodity Index Funds Trust
| June 30, 2013 | December 31, 2012 | |||||||
| Assets | ||||||||
| Cash and cash equivalents (Notes 2 and 6) | $ | 457,292,944 | $ | 437,046,560 | ||||
| Equity in Newedge trading accounts: | ||||||||
| Cash and cash equivalents | 75,202,406 | 61,899,628 | ||||||
| Unrealized loss on open commodity futures contracts | (27,777,361 | ) | (5,287,422 | ) | ||||
| Receivable for units sold | – | 2,922,886 | ||||||
| Receivable from Sponsor (Note 4) | 168,152 | 232,531 | ||||||
| Interest receivable | 1,343 | 531 | ||||||
| Other assets | 30,601 | 4,686 | ||||||
| Total assets | $ | 504,918,085 | $ | 496,819,400 | ||||
| Liabilities and Capital | ||||||||
| Management fees payable (Note 4) | $ | 400,276 | $ | 398,979 | ||||
| Professional fees payable | 321,287 | 554,124 | ||||||
| Brokerage commissions payable | 22,815 | 22,815 | ||||||
| Other liabilities | 15,582 | 11,940 | ||||||
| Total liabilities | 759,960 | 987,858 | ||||||
| Commitments and Contingencies (Notes 4, 5, and 6) | ||||||||
| Capital | ||||||||
| Sponsor | – | – | ||||||
| Unitholders | 504,158,125 | 495,831,542 | ||||||
| Total Capital | 504,158,125 | 495,831,542 | ||||||
| Total liabilities and capital | $ | 504,918,085 | $ | 496,819,400 | ||||
| Units outstanding | 9,600,000 | 8,650,000 | ||||||
See accompanying notes to condensed financial statements.
| 6 |
United States Commodity Index Funds Trust
Condensed Schedule of Investments (Unaudited)
At June 30, 2013
United States Commodity Index Fund
| Number of Contracts | Unrealized Gain (Loss) on Open Commodity Contracts | % of Capital | ||||||||||
| Open Futures Contracts - Long | ||||||||||||
| Foreign Contracts | ||||||||||||
| ICE-UK Gasoil Futures QS August 2013 contracts, expiring August 2013 | 415 | $ | 273,050 | 0.06 | ||||||||
| LME Tin Futures LT August 2013 contracts, expiring August 2013 | 322 | (6,133,007 | ) | (1.23 | ) | |||||||
| LME Zinc Futures LX August 2013 contracts, expiring August 2013 | 689 | (4,819,869 | ) | (0.97 | ) | |||||||
| LME Lead Futures LL September 2013 contracts, expiring September 2013 | 721 | (6,139,700 | ) | (1.23 | ) | |||||||
| LME Zinc Futures LX October 2013 contracts, expiring October 2013 | 748 | (4,420,494 | ) | (0.89 | ) | |||||||
| LME Tin Futures LT November 2013 contracts, expiring November 2013 | 354 | (5,708,887 | ) | (1.15 | ) | |||||||
| ICE-US Cocoa Futures CC December 2013 contracts, expiring December 2013 | 1,658 | (873,030 | ) | (0.17 | ) | |||||||
| ICE-US Cotton #2 Futures CT December 2013 contracts, expiring December 2013 | 847 | 367,075 | 0.07 | |||||||||
| ICE Brent Crude Oil Futures CO June 2014 contracts, expiring May 2014 | 367 | (233,350 | ) | (0.05 | ) | |||||||
| 6,121 | (27,688,212 | ) | (5.56 | ) | ||||||||
| United States Contracts | ||||||||||||
| CME Lean Hogs Futures LH October 2013 contracts, expiring October 2013 | 1,050 | 1,622,680 | 0.32 | |||||||||
| NYMEX Natural Gas Futures NG October 2013 contracts, expiring September 2013 | 976 | (1,207,650 | ) | (0.24 | ) | |||||||
| NYMEX Platinum Futures PL October 2013 contracts, expiring October 2013 | 531 | (3,252,255 | ) | (0.65 | ) | |||||||
| NYMEX RBOB Gasoline Futures RB October 2013 contracts, expiring September 2013 | 331 | (660,135 | ) | (0.13 | ) | |||||||
| CBOT Soybean Futures S November 2013 contracts, expiring November 2013 | 563 | (1,876,388 | ) | (0.38 | ) | |||||||
| CBOT Corn Futures C December 2013 contracts, expiring December 2013 | 1,321 | (7,078,850 | ) | (1.42 | ) | |||||||
| CBOT Soybean Meal Futures SM December 2013 contracts, expiring December 2013 | 935 | 631,450 | 0.13 | |||||||||
| NYMEX WTI Crude Oil Futures CL April 2014 contracts, expiring March 2014 | 396 | 81,650 | 0.01 | |||||||||
| NYMEX Heating Oil Futures HO June 2014 contracts, expiring May 2014 | 304 | (156,059 | ) | (0.03 | ) | |||||||
| 6,407 | (11,895,557 | ) | (2.39 | ) | ||||||||
| Open Futures Contracts - Short* | ||||||||||||
| Foreign Contracts | ||||||||||||
| LME Tin Futures LT August 2013 contracts, expiring August 2013 | 322 | 6,002,351 | 1.21 | |||||||||
| LME Zinc Futures LX August 2013 contracts, expiring August 2013 | 689 | 5,075,210 | 1.02 | |||||||||
| LME Lead Futures LL September 2013 contracts, expiring September 2013 | 21 | 24,847 | 0.00 | |||||||||
| LME Zinc Futures LX October 2013 contracts, expiring October 2013 | 748 | 1,092,406 | 0.22 | |||||||||
| LME Tin Futures LT November 2013 contracts, expiring November 2013 | 354 | 144,463 | 0.03 | |||||||||
| 2,134 | 12,339,277 | 2.48 | ||||||||||
| Total Open Futures Contracts** | 14,662 | $ | (27,244,492 | ) | (5.47 | ) | ||||||
See accompanying notes to condensed financial statements.
| 7 |
United States Commodity Index Funds Trust
Condensed Schedule of Investments (Unaudited)
At June 30, 2013
United States Commodity Index Fund (Continued)
| Principal Amount | Market Value | % of Capital | ||||||||||
| Cash Equivalents | ||||||||||||
| United States Treasury Obligations | ||||||||||||
| U.S. Treasury Bills: | ||||||||||||
| 0.05%, 7/11/2013 | $ | 10,000,000 | $ | 9,999,840 | 2.01 | |||||||
| 0.06%, 7/11/2013 | 40,000,000 | 39,999,363 | 8.04 | |||||||||
| 0.04%, 7/18/2013 | 80,000,000 | 79,998,323 | 16.07 | |||||||||
| 0.04%, 7/25/2013 | 55,000,000 | 54,998,373 | 11.05 | |||||||||
| 0.05%, 8/01/2013 | 30,000,000 | 29,998,828 | 6.03 | |||||||||
| 0.07%, 8/08/2013 | 20,000,000 | 19,999,313 | 4.02 | |||||||||
| 0.04%, 8/22/2013 | 20,000,000 | 19,998,946 | 4.02 | |||||||||
| 0.03%, 9/05/2013 | 20,200,000 | 20,198,852 | 4.06 | |||||||||
| 0.04%, 9/12/2013 | 30,000,000 | 29,997,415 | 6.03 | |||||||||
| 0.05%, 9/19/2013 | 40,000,000 | 39,995,778 | 8.04 | |||||||||
| 0.05%, 9/26/2013 | 50,000,000 | 49,993,494 | 10.04 | |||||||||
| 0.06%, 9/26/2013 | 20,000,000 | 19,997,398 | 4.02 | |||||||||
| 0.05%, 10/10/2013 | 20,000,000 | 19,997,335 | 4.02 | |||||||||
| 0.04%, 10/17/2013 | 20,000,000 | 19,997,900 | 4.02 | |||||||||
| Total Cash Equivalents | $ | 455,171,158 | 91.47 | |||||||||
* All short contracts are offset by the same number of Futures Contracts in the corresponding long positions and are acquired solely for the purpose of reducing a long position (e.g., due to a redemption or to reflect a rebalancing of the Commodity Index).
** Collateral amounted to $72,912,200 on open futures contracts.
See accompanying notes to condensed financial statements.
| 8 |
United States Commodity Index Funds Trust
Condensed Schedule of Investments (Unaudited)
At June 30, 2013
United States Copper Index Fund
| Number of Contracts | Unrealized Loss on Open Commodity Contracts | % of Capital | ||||||||||
| Open Futures Contracts - Long | ||||||||||||
| United States Contracts | ||||||||||||
| COMEX Copper Futures HG August 2013 contracts, expiring August 2013 | 7 | $ | (45,950 | ) | (2.20 | ) | ||||||
| COMEX Copper Futures HG November 2013 contracts, expiring November 2013 | 7 | (54,613 | ) | (2.61 | ) | |||||||
| COMEX Copper Futures HG December 2013 contracts, expiring December 2013 | 14 | (107,687 | ) | (5.14 | ) | |||||||
| Total Open Futures Contracts* | 28 | $ | (208,250 | ) | (9.95 | ) | ||||||
| Principal Amount | Market Value | |||||||||||
| Cash Equivalents | ||||||||||||
| United States Treasury Obligations | ||||||||||||
| U.S. Treasury Bills: | ||||||||||||
| 0.06%, 7/11/2013 | $ | 250,000 | $ | 249,996 | 11.94 | |||||||
| 0.04%, 7/18/2013 | 300,000 | 299,994 | 14.33 | |||||||||
| 0.05%, 8/01/2013 | 50,000 | 49,998 | 2.39 | |||||||||
| 0.03%, 8/08/2013 | 100,000 | 99,997 | 4.78 | |||||||||
| 0.03%, 8/22/2013 | 100,000 | 99,996 | 4.78 | |||||||||
| 0.04%, 9/05/2013 | 500,000 | 499,961 | 23.88 | |||||||||
| 0.03%, 9/12/2013 | 100,000 | 99,994 | 4.78 | |||||||||
| 0.03%, 9/19/2013 | 100,000 | 99,993 | 4.78 | |||||||||
| 0.05%, 9/26/2013 | 400,000 | 399,949 | 19.10 | |||||||||
| Total Cash Equivalents | $ | 1,899,878 | 90.76 | |||||||||
* Collateral amounted to $524,239 on open futures contracts.
See accompanying notes to condensed financial statements.
| 9 |
United States Commodity Index Funds Trust
Condensed Schedule of Investments (Unaudited)
At June 30, 2013
United States Agriculture Index Fund
| Number of Contracts | Unrealized Gain (Loss) on Open Commodity Contracts | % of Capital | ||||||||||
| Open Futures Contracts - Long | ||||||||||||
| Foreign Contracts | ||||||||||||
| ICE-US Coffee-C Futures KC September 2013 contracts, expiring September 2013 | 4 | $ | (12,206 | ) | (0.52 | ) | ||||||
| ICE-US Sugar #11 Futures SB October 2013 contracts, expiring September 2013 | 10 | (638 | ) | (0.03 | ) | |||||||
| ICE-Canola Futures RS November 2013 contracts, expiring November 2013 | 2 | (1,493 | ) | (0.06 | ) | |||||||
| ICE-US Cocoa Futures CC December 2013 contracts, expiring December 2013 | 8 | (1,470 | ) | (0.06 | ) | |||||||
| ICE-US Cotton #2 Futures CT December 2013 contracts, expiring December 2013 | 4 | 2,870 | 0.12 | |||||||||
| 28 | (12,937 | ) | (0.55 | ) | ||||||||
| United States Contracts | ||||||||||||
| CME Feeder Cattle Futures FC August 2013 contracts, expiring August 2013 | 1 | (913 | ) | (0.04 | ) | |||||||
| CME Lean Hogs Futures LH August 2013 contracts, expiring August 2013 | 5 | 12,490 | 0.54 | |||||||||
| CME Live Cattle Futures LC August 2013 contracts, expiring August 2013 | 4 | 3,660 | 0.16 | |||||||||
| CBOT Wheat Futures W September 2013 contracts, expiring September 2013 | 4 | (10,150 | ) | (0.44 | ) | |||||||
| KCBT Hard Red Winter Wheat Futures KW September 2013 contracts, expiring September 2013 | 4 | (12,950 | ) | (0.56 | ) | |||||||
| CBOT Soybean Meal Futures SM October 2013 contracts, expiring October 2013 | 5 | 10,740 | 0.46 | |||||||||
| CBOT Soybean Oil Futures BO October 2013 contracts, expiring October 2013 | 1 | (1,698 | ) | (0.07 | ) | |||||||
| CBOT Soybean Futures S November 2013 contracts, expiring November 2013 | 5 | 1,888 | 0.08 | |||||||||
| CBOT Corn Futures C December 2013 contracts, expiring December 2013 | 13 | (55,875 | ) | (2.40 | ) | |||||||
| 42 | (52,808 | ) | (2.27 | ) | ||||||||
| Total Open Futures Contracts* | 70 | $ | (65,745 | ) | (2.82 | ) | ||||||
| Principal Amount | Market Value | |||||||||||
| Cash Equivalents | ||||||||||||
| United States Treasury Obligations | ||||||||||||
| U.S. Treasury Bills: | ||||||||||||
| 0.06%, 7/11/2013 | $ | 100,000 | $ | 99,998 | 4.29 | |||||||
| 0.04%, 7/18/2013 | 400,000 | 399,992 | 17.16 | |||||||||
| 0.03%, 8/08/2013 | 200,000 | 199,995 | 8.58 | |||||||||
| 0.03%, 8/22/2013 | 150,000 | 149,993 | 6.44 | |||||||||
| 0.04%, 9/05/2013 | 300,000 | 299,976 | 12.87 | |||||||||
| 0.03%, 9/12/2013 | 100,000 | 99,994 | 4.29 | |||||||||
| 0.03%, 9/19/2013 | 100,000 | 99,990 | 4.29 | |||||||||
| 0.05%, 9/19/2013 | 300,000 | 299,971 | 12.87 | |||||||||
| 0.05%, 9/26/2013 | 500,000 | 499,937 | 21.45 | |||||||||
| Total Cash Equivalents | $ | 2,149,846 | 92.24 | |||||||||
* Collateral amounted to $247,223 on open futures contracts.
See accompanying notes to condensed financial statements.
| 10 |
United States Commodity Index Funds Trust
Condensed Schedule of Investments (Unaudited)
At June 30, 2013
United States Metals Index Fund
| Number of Contracts | Unrealized Gain (Loss) on Open Commodity Contracts | % of Capital | ||||||||||
| Open Futures Contracts - Long | ||||||||||||
| Foreign Contracts | ||||||||||||
| LME Nickel Futures LN August 2013 contracts, expiring August 2013 | 9 | $ | (134,736 | ) | (6.38 | ) | ||||||
| LME Tin Futures LT August 2013 contracts, expiring August 2013 | 6 | (101,157 | ) | (4.79 | ) | |||||||
| LME Lead Futures LL September 2013 contracts, expiring September 2013 | 8 | (40,294 | ) | (1.91 | ) | |||||||
| LME Aluminum Futures LA January 2014 contracts, expiring January 2014 | 10 | (44,644 | ) | (2.12 | ) | |||||||
| LME Zinc Futures LX January 2014 contracts, expiring January 2014 | 2 | (1,631 | ) | (0.08 | ) | |||||||
| 35 | (322,462 | ) | (15.28 | ) | ||||||||
| United States Contracts | ||||||||||||
| COMEX Silver Futures SI September 2013 contracts, expiring September 2013 | 4 | (26,435 | ) | (1.25 | ) | |||||||
| NYMEX Palladium Futures PA September 2013 contracts, expiring September 2013 | 2 | (13,900 | ) | (0.66 | ) | |||||||
| COMEX Gold Futures GC October 2013 contracts, expiring October 2013 | 3 | (6,030 | ) | (0.28 | ) | |||||||
| NYMEX Platinum Futures PL October 2013 contracts, expiring October 2013 | 1 | (5,930 | ) | (0.28 | ) | |||||||
| COMEX Copper Futures HG December 2013 contracts, expiring December 2013 | 6 | (78,250 | ) | (3.71 | ) | |||||||
| 16 | (130,545 | ) | (6.18 | ) | ||||||||
| Open Futures Contracts - Short* | ||||||||||||
| Foreign Contracts | ||||||||||||
| LME Nickel Futures LN August 2013 contracts, expiring August 2013 | 8 | 93,776 | 4.44 | |||||||||
| LME Tin Futures LN August 2013 contracts, expiring August 2013 | 5 | 75,468 | 3.58 | |||||||||
| LME Lead Futures LL September 2013 contracts, expiring September 2013 | 5 | 13,054 | 0.62 | |||||||||
| LME Aluminum Futures LA January 2014 contacts, expiring January 2014 | 4 | 11,835 | 0.56 | |||||||||
| 22 | 194,133 | 9.20 | ||||||||||
| Total Open Futures Contracts** | 73 | $ | (258,874 | ) | (12.26 | ) | ||||||
| Principal Amount | Market Value | |||||||||||
| Cash Equivalents | ||||||||||||
| United States Treasury Obligations | ||||||||||||
| U.S. Treasury Bills: | ||||||||||||
| 0.03%, 7/05/2013 | $ | 100,000 | $ | 99,999 | 4.74 | |||||||
| 0.05%, 7/18/2013 | 200,000 | 199,995 | 9.47 | |||||||||
| 0.04%, 7/25/2013 | 850,000 | 849,975 | 40.27 | |||||||||
| 0.05%, 8/01/2013 | 150,000 | 149,994 | 7.11 | |||||||||
| 0.03%, 8/08/2013 | 100,000 | 99,996 | 4.74 | |||||||||
| 0.04%, 8/22/2013 | 100,000 | 99,995 | 4.74 | |||||||||
| 0.03%, 9/05/2013 | 200,000 | 199,989 | 9.47 | |||||||||
| 0.05%, 9/19/2013 | 200,000 | 199,979 | 9.47 | |||||||||
| 0.05%, 10/03/2013 | 200,000 | 199,976 | 9.47 | |||||||||
| Total Cash Equivalents | $ | 2,099,898 | 99.48 | |||||||||
* All short contracts are offset by the same number of Futures Contracts in the corresponding long positions and are acquired solely for the purpose of reducing a long position (e.g., due to a redemption or to reflect a rebalancing of the Metals Index).
** Collateral amounted to $552,183 on open futures contracts.
See accompanying notes to condensed financial statements.
| 11 |
United States Commodity Index Funds Trust
Condensed Statements of Operations (Unaudited)
For the three and six months ended June 30, 2013 and 2012
United States Commodity Index Fund
| Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on closed positions | $ | (23,731,035 | ) | $ | (25,060,057 | ) | $ | (20,643,311 | ) | $ | (32,846,757 | ) | ||||
| Change in unrealized gain (loss) on open positions | (6,914,345 | ) | (334,219 | ) | (22,023,592 | ) | 24,258,357 | |||||||||
| Realized gain on foreign currency transactions | 369 | - | 369 | - | ||||||||||||
| Change in unrealized gain (loss) on foreign currency translations | (436 | ) | 112 | 218 | 40 | |||||||||||
| Interest income | 70,020 | 57,475 | 151,816 | 94,915 | ||||||||||||
| Other income | 2,450 | 1,400 | 7,350 | 4,550 | ||||||||||||
| Total loss | (30,572,977 | ) | (25,335,289 | ) | (42,507,150 | ) | (8,488,895 | ) | ||||||||
| Expenses | ||||||||||||||||
| Management fees (Note 4) | 1,183,699 | 957,412 | 2,381,833 | 1,871,492 | ||||||||||||
| Professional fees | 181,322 | 126,528 | 258,715 | 235,773 | ||||||||||||
| Brokerage commissions | 109,715 | 66,909 | 202,327 | 135,868 | ||||||||||||
| Other expenses | 27,621 | 17,603 | 48,969 | 33,142 | ||||||||||||
| Total expenses | 1,502,357 | 1,168,452 | 2,891,844 | 2,276,275 | ||||||||||||
| Expense waiver (Note 4) | - | - | - | - | ||||||||||||
| Net expenses | 1,502,357 | 1,168,452 | 2,891,844 | 2,276,275 | ||||||||||||
| Net loss | $ | (32,075,334 | ) | $ | (26,503,741 | ) | $ | (45,398,994 | ) | $ | (10,765,170 | ) | ||||
| Net loss per unit | $ | (3.49 | ) | $ | (3.79 | ) | $ | (4.94 | ) | $ | (0.96 | ) | ||||
| Net loss per weighted average unit | $ | (3.54 | ) | $ | (3.83 | ) | $ | (5.10 | ) | $ | (1.63 | ) | ||||
| Weighted average units outstanding | 9,060,989 | 6,923,077 | 8,904,144 | 6,588,462 | ||||||||||||
See accompanying notes to condensed financial statements.
| 12 |
United States Commodity Index Funds Trust
Condensed Statements of Operations (Unaudited)
For the three and six months ended June 30, 2013 and 2012
United States Copper Index Fund
| Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on closed positions | $ | (257,575 | ) | $ | (143,287 | ) | $ | (225,525 | ) | $ | (82,425 | ) | ||||
| Change in unrealized gain (loss) on open positions | (13,087 | ) | (100,375 | ) | (214,825 | ) | 106,913 | |||||||||
| Interest income | 325 | 420 | 776 | 667 | ||||||||||||
| Total income (loss) | (270,337 | ) | (243,242 | ) | (439,574 | ) | 25,155 | |||||||||
| Expenses | ||||||||||||||||
| Management fees (Note 4) | 3,647 | 5,283 | 7,685 | 11,616 | ||||||||||||
| Professional fees | 24,934 | 21,192 | 49,758 | 43,184 | ||||||||||||
| Brokerage commissions | 354 | 277 | 400 | 319 | ||||||||||||
| Other expenses | 123 | 113 | 235 | 198 | ||||||||||||
| Total expenses | 29,058 | 26,865 | 58,078 | 55,317 | ||||||||||||
| Expense waiver (Note 4) | (24,095 | ) | (20,257 | ) | (47,990 | ) | (41,249 | ) | ||||||||
| Net expenses | 4,963 | 6,608 | 10,088 | 14,068 | ||||||||||||
| Net income (loss) | $ | (275,300 | ) | $ | (249,850 | ) | $ | (449,662 | ) | $ | 11,087 | |||||
| Net income (loss) per unit | $ | (2.76 | ) | $ | (2.50 | ) | $ | (4.50 | ) | $ | 0.11 | |||||
| Net income (loss) per weighted average unit | $ | (2.75 | ) | $ | (2.50 | ) | $ | (4.50 | ) | $ | 0.11 | |||||
| Weighted average units outstanding | 100,000 | 100,000 | 100,000 | 100,000 | ||||||||||||
See accompanying notes to condensed financial statements.
| 13 |
United States Commodity Index Funds Trust
Condensed Statements of Operations (Unaudited)
For the three and six months ended June 30, 2013 and 2012
United States Agriculture Index Fund *
| Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on closed positions | $ | (105,568 | ) | $ | (114,435 | ) | $ | (266,054 | ) | $ | (114,435 | ) | ||||
| Change in unrealized gain on open positions | 41,566 | 246,428 | 53,410 | 246,428 | ||||||||||||
| Realized loss on foreign currency transactions | (227 | ) | (30 | ) | (226 | ) | (30 | ) | ||||||||
| Change in unrealized gain (loss) on foreign currency translations | 81 | (27 | ) | (116 | ) | (27 | ) | |||||||||
| Interest income | 352 | 467 | 819 | 467 | ||||||||||||
| Other income | – | 350 | – | 350 | ||||||||||||
| Total income (loss) | (63,796 | ) | 132,753 | (212,167 | ) | 132,753 | ||||||||||
| Expenses | ||||||||||||||||
| Management fees (Note 4) | 4,768 | 6,004 | 9,672 | 6,004 | ||||||||||||
| Professional fees | 31,122 | 21,725 | 61,902 | 21,725 | ||||||||||||
| Brokerage commissions | 443 | 976 | 1,014 | 976 | ||||||||||||
| Other expenses | 128 | 76 | 210 | 76 | ||||||||||||
| Total expenses | 36,461 | 28,781 | 72,798 | 28,781 | ||||||||||||
| Expense waiver (Note 4) | (30,231 | ) | (20,700 | ) | (60,094 | ) | (20,700 | ) | ||||||||
| Net expenses | 6,230 | 8,081 | 12,704 | 8,081 | ||||||||||||
| Net income (loss) | $ | (70,026 | ) | $ | 124,672 | $ | (224,871 | ) | $ | 124,672 | ||||||
| Net income (loss) per unit | $ | (0.70 | ) | $ | 0.53 | $ | (2.25 | ) | $ | 0.53 | ||||||
| Net income (loss) per weighted average unit | $ | (0.70 | ) | $ | 0.95 | $ | (2.25 | ) | $ | 0.95 | ||||||
| Weighted average units outstanding | 100,000 | 131,686 | 100,000 | 131,686 | ||||||||||||
* The commencement of operations of the United States Agriculture Index Fund was April 13, 2012.
See accompanying notes to condensed financial statements.
| 14 |
United States Commodity Index Funds Trust
Condensed Statements of Operations (Unaudited)
For the three and six months ended June 30, 2013 and 2012
United States Metals Index Fund *
| Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on closed positions | $ | (201,591 | ) | $ | (30,006 | ) | $ | (221,153 | ) | $ | (30,006 | ) | ||||
| Change in unrealized gain (loss) on open positions | (200,072 | ) | 329 | (304,932 | ) | 329 | ||||||||||
| Realized gain on foreign currency transactions | 3 | – | 3 | – | ||||||||||||
| Realized gain on short-term investments | 1 | – | 1 | – | ||||||||||||
| Change in unrealized gain (loss) on foreign currency translations | (4 | ) | – | 2 | – | |||||||||||
| Interest income | 323 | 67 | 769 | 67 | ||||||||||||
| Total loss | (401,340 | ) | (29,610 | ) | (525,310 | ) | (29,610 | ) | ||||||||
| Expenses | ||||||||||||||||
| Management fees (Note 4) | 4,023 | 556 | 8,586 | 556 | ||||||||||||
| Professional fees | 31,122 | 3,300 | 61,902 | 3,300 | ||||||||||||
| Brokerage commissions | 131 | 182 | 377 | 182 | ||||||||||||
| Other expenses | 128 | 9 | 215 | 9 | ||||||||||||
| Total expenses | 35,404 | 4,047 | 71,080 | 4,047 | ||||||||||||
| Expense waiver (Note 4) | (30,264 | ) | (3,181 | ) | (60,068 | ) | (3,181 | ) | ||||||||
| Net expenses | 5,140 | 866 | 11,012 | 866 | ||||||||||||
| Net loss | $ | (406,480 | ) | $ | (30,476 | ) | $ | (536,322 | ) | $ | (30,476 | ) | ||||
| Net loss per unit | $ | (4.06 | ) | $ | (0.30 | ) | $ | (5.36 | ) | $ | (0.30 | ) | ||||
| Net loss per weighted average unit | $ | (4.06 | ) | $ | (0.30 | ) | $ | (5.36 | ) | $ | (0.30 | ) | ||||
| Weighted average units outstanding | 100,000 | 100,400 | 100,000 | 100,400 | ||||||||||||
* The commencement of operations of the United States Metals Index Fund was June 19, 2012.
See accompanying notes to condensed financial statements.
| 15 |
United States Commodity Index Funds Trust
Condensed Statements of Operations (Unaudited)
For the three and six months ended June 30, 2013 and 2012
United States Commodity Index Funds Trust
| Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on closed positions | $ | (24,295,769 | ) | $ | (25,347,785 | ) | $ | (21,356,043 | ) | $ | (33,073,623 | ) | ||||
| Change in unrealized gain (loss) on open positions | (7,085,938 | ) | (187,837 | ) | (22,489,939 | ) | 24,612,027 | |||||||||
| Realized gain (loss) on foreign currency transactions | 145 | (30 | ) | 146 | (30 | ) | ||||||||||
| Realized gain on short-term investments | 1 | – | 1 | – | ||||||||||||
| Change in unrealized gain (loss) on foreign currency translations | (359 | ) | 85 | 104 | 13 | |||||||||||
| Interest income | 71,020 | 58,429 | 154,180 | 96,116 | ||||||||||||
| Other income | 2,450 | 1,750 | 7,350 | 4,900 | ||||||||||||
| Total loss | (31,308,450 | ) | (25,475,388 | ) | (43,684,201 | ) | (8,360,597 | ) | ||||||||
| Expenses | ||||||||||||||||
| Management fees (Note 4) | 1,196,137 | 969,255 | 2,407,776 | 1,889,668 | ||||||||||||
| Professional fees | 268,500 | 172,745 | 432,277 | 303,982 | ||||||||||||
| Brokerage commissions | 110,643 | 68,344 | 204,118 | 137,345 | ||||||||||||
| Other expenses | 28,000 | 17,801 | 49,629 | 33,425 | ||||||||||||
| Total expenses | 1,603,280 | 1,228,145 | 3,093,800 | 2,364,420 | ||||||||||||
| Expense waiver (Note 4) | (84,590 | ) | (44,138 | ) | (168,152 | ) | (65,130 | ) | ||||||||
| Net expenses | 1,518,690 | 1,184,007 | 2,925,648 | 2,299,290 | ||||||||||||
| Net loss | $ | (32,827,140 | ) | $ | (26,659,395 | ) | $ | (46,609,849 | ) | $ | (10,659,887 | ) | ||||
See accompanying notes to condensed financial statements.
| 16 |
United States Commodity Index Funds Trust
Condensed Statement of Changes in Capital (Unaudited)
For the six months ended June 30, 2013
United States Commodity Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Balances, at December 31, 2012 | $ | – | $ | 488,085,727 | $ | 488,085,727 | ||||||
| Additions | – | 66,020,733 | 66,020,733 | |||||||||
| Redemptions | – | (11,084,301 | ) | (11,084,301 | ) | |||||||
| Net loss | – | (45,398,994 | ) | (45,398,994 | ) | |||||||
| Balances, at June 30, 2013 | $ | – | $ | 497,623,165 | $ | 497,623,165 | ||||||
Condensed Statement of Changes in Units Outstanding (Unaudited)
For the six months ended June 30, 2013
United States Commodity Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Units Outstanding, at December 31, 2012 | – | 8,350,000 | 8,350,000 | |||||||||
| Additions | – | 1,150,000 | 1,150,000 | |||||||||
| Redemptions | – | (200,000 | ) | (200,000 | ) | |||||||
| Units Outstanding, at June 30, 2013 | – | 9,300,000 | 9,300,000 | |||||||||
| Net Asset Value Per Unit: | ||||||||||||
| At December 31, 2012 | $ | 58.45 | ||||||||||
| At June 30, 2013 | $ | 53.51 | ||||||||||
See accompanying notes to condensed financial statements.
| 17 |
United States Commodity Index Funds Trust
Condensed Statement of Changes in Capital (Unaudited)
For the six months ended June 30, 2013
United States Copper Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Balances, at December 31, 2012 | $ | – | $ | 2,542,946 | $ | 2,542,946 | ||||||
| Additions | – | – | – | |||||||||
| Redemptions | – | – | – | |||||||||
| Net loss | – | (449,662 | ) | (449,662 | ) | |||||||
| Balances, at June 30, 2013 | $ | – | $ | 2,093,284 | $ | 2,093,284 | ||||||
Condensed Statement of Changes in Units Outstanding (Unaudited)
For the six months ended June 30, 2013
United States Copper Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Units Outstanding, at December 31, 2012 | – | 100,000 | 100,000 | |||||||||
| Additions | – | – | – | |||||||||
| Redemptions | – | – | – | |||||||||
| Units Outstanding, at June 30, 2013 | – | 100,000 | 100,000 | |||||||||
| Net Asset Value Per Unit: | ||||||||||||
| At December 31, 2012 | $ | 25.43 | ||||||||||
| At June 30, 2013 | $ | 20.93 | ||||||||||
See accompanying notes to condensed financial statements.
| 18 |
United States Commodity Index Funds Trust
Condensed Statement of Changes in Capital (Unaudited)
For the six months ended June 30, 2013
United States Agriculture Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Balances, at December 31, 2012 | $ | – | $ | 2,555,692 | $ | 2,555,692 | ||||||
| Additions | – | – | – | |||||||||
| Redemptions | – | – | – | |||||||||
| Net loss | – | (224,871 | ) | (224,871 | ) | |||||||
| Balances, at June 30, 2013 | $ | – | $ | 2,330,821 | $ | 2,330,821 | ||||||
Condensed Statement of Changes in Units Outstanding (Unaudited)
For the six months ended June 30, 2013
United States Agriculture Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Units Outstanding, at December 31, 2012 | – | 100,000 | 100,000 | |||||||||
| Additions | – | – | – | |||||||||
| Redemptions | – | – | – | |||||||||
| Units Outstanding, at June 30, 2013 | – | 100,000 | 100,000 | |||||||||
| Net Asset Value Per Unit: | ||||||||||||
| At December 31, 2012 | $ | 25.56 | ||||||||||
| At June 30, 2013 | $ | 23.31 | ||||||||||
See accompanying notes to condensed financial statements.
| 19 |
United States Commodity Index Funds Trust
Condensed Statement of Changes in Capital (Unaudited)
For the six months ended June 30, 2013
United States Metals Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Balances, at December 31, 2012 | $ | – | $ | 2,647,177 | $ | 2,647,177 | ||||||
| Additions | – | – | – | |||||||||
| Redemptions | – | – | – | |||||||||
| Net loss | – | (536,322 | ) | (536,322 | ) | |||||||
| Balances, at June 30, 2013 | $ | – | $ | 2,110,855 | $ | 2,110,855 | ||||||
Condensed Statement of Changes in Units Outstanding (Unaudited)
For the six months ended June 30, 2013
United States Metals Index Fund
| Sponsor | Unitholders | Total | ||||||||||
| Units Outstanding, at December 31, 2012 | – | 100,000 | 100,000 | |||||||||
| Additions | – | – | – | |||||||||
| Redemptions | – | – | – | |||||||||
| Units Outstanding, at June 30, 2013 | – | 100,000 | 100,000 | |||||||||
| Net Asset Value Per Unit: | ||||||||||||
| At December 31, 2012 | $ | 26.47 | ||||||||||
| At June 30, 2013 | $ | 21.11 | ||||||||||
See accompanying notes to condensed financial statements.
| 20 |
United States Commodity Index Funds Trust
Condensed Statement of Changes in Capital (Unaudited)
For the six months ended June 30, 2013
United States Commodity Index Funds Trust
| Sponsor | Unitholders | Total | ||||||||||
| Balances, at December 31, 2012 | $ | – | $ | 495,831,542 | $ | 495,831,542 | ||||||
| Additions | – | 66,020,733 | 66,020,733 | |||||||||
| Redemptions | – | (11,084,301 | ) | (11,084,301 | ) | |||||||
| Net loss | – | (46,609,849 | ) | (46,609,849 | ) | |||||||
| Balances, at June 30, 2013 | $ | - | $ | 504,158,125 | $ | 504,158,125 | ||||||
Condensed Statement of Changes in Units Outstanding (Unaudited)
For the six months ended June 30, 2013
United States Commodity Index Funds Trust
| Sponsor | Unitholders | Total | ||||||||||
| Units Outstanding, at December 31, 2012 | – | 8,650,000 | 8,650,000 | |||||||||
| Additions | – | 1,150,000 | 1,150,000 | |||||||||
| Redemptions | – | (200,000 | ) | (200,000 | ) | |||||||
| Units Outstanding, at June 30, 2013 | – | 9,600,000 | 9,600,000 | |||||||||
See accompanying notes to condensed financial statements.
| 21 |
United States Commodity Index Funds Trust
Condensed Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2013 and 2012
United States Commodity Index Fund
| Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (45,398,994 | ) | $ | (10,765,170 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| (Increase) decrease in commodity futures trading account - cash and cash equivalents | (13,345,660 | ) | 21,324,289 | |||||
| Unrealized (gain) loss on open futures contracts | 22,023,592 | (24,258,357 | ) | |||||
| Increase in interest receivable | (787 | ) | (1,095 | ) | ||||
| Increase in other assets | (25,509 | ) | (14,822 | ) | ||||
| Increase (decrease) in management fees payable | 2,008 | (26,900 | ) | |||||
| Decrease in professional fees payable | (164,571 | ) | (33,316 | ) | ||||
| Decrease in brokerage commissions payable | – | (3,380 | ) | |||||
| Increase (decrease) in other liabilities | 3,621 | (8,416 | ) | |||||
| Net cash used in operating activities | (36,906,300 | ) | (13,787,167 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Addition of units | 68,943,619 | 68,486,860 | ||||||
| Redemption of units | (11,084,301 | ) | (17,511,744 | ) | ||||
| Net cash provided by financing activities | 57,859,318 | 50,975,116 | ||||||
| Net Increase in Cash and Cash Equivalents | 20,953,018 | 37,187,949 | ||||||
| Cash and Cash Equivalents, beginning of period | 430,800,077 | 310,491,998 | ||||||
| Cash and Cash Equivalents, end of period | $ | 451,753,095 | $ | 347,679,947 | ||||
See accompanying notes to condensed financial statements.
| 22 |
United States Commodity Index Funds Trust
Condensed Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2013 and 2012
United States Copper Index Fund
| Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | (449,662 | ) | $ | 11,087 | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| (Increase) decrease in commodity futures trading account - cash and cash equivalents | (96,203 | ) | 82,588 | |||||
| Unrealized (gain) loss on open futures contracts | 214,825 | (106,913 | ) | |||||
| (Increase) decrease in receivable from Sponsor | 48,374 | (28,796 | ) | |||||
| Increase in interest receivable | (7 | ) | (37 | ) | ||||
| Increase in other assets | (115 | ) | (119 | ) | ||||
| Decrease in management fees payable | (220 | ) | (732 | ) | ||||
| Increase (decrease) in professional fees payable | (50,435 | ) | 30,260 | |||||
| Increase in other liabilities | 7 | 34 | ||||||
| Net cash used in operating activities | (333,436 | ) | (12,628 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Addition of units | – | – | ||||||
| Redemption of units | – | – | ||||||
| Net cash provided by (used in) financing activities | – | – | ||||||
| Net Decrease in Cash and Cash Equivalents | (333,436 | ) | (12,628 | ) | ||||
| Cash and Cash Equivalents, beginning of period | 2,109,061 | 2,114,061 | ||||||
| Cash and Cash Equivalents, end of period | $ | 1,775,625 | $ | 2,101,433 | ||||
See accompanying notes to condensed financial statements.
| 23 |
United States Commodity Index Funds Trust
Condensed Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2013 and 2012
United States Agriculture Index Fund*
| Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | (224,871 | ) | $ | 124,672 | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| (Increase) decrease in commodity futures trading account - cash and cash equivalents | 229,196 | (315,933 | ) | |||||
| Unrealized gain on open futures contracts | (53,410 | ) | (246,428 | ) | ||||
| (Increase) decrease in receivable from Sponsor | 16,757 | (20,701 | ) | |||||
| Increase in interest receivable | (14 | ) | (39 | ) | ||||
| Increase in other assets | (142 | ) | – | |||||
| Increase (decrease) in management fees payable | (194 | ) | 2,351 | |||||
| Increase (decrease) in professional fees payable | (18,128 | ) | 21,725 | |||||
| Increase in other liabilities | 8 | 76 | ||||||
| Net cash used in operating activities | (50,798 | ) | (434,277 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Addition of units | – | 3,704,409 | ||||||
| Redemption of units | – | (1,009 | ) | |||||
| Net cash provided by financing activities | – | 3,703,400 | ||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (50,798 | ) | 3,269,123 | |||||
| Cash and Cash Equivalents, beginning of period | 2,000,438 | 1,000 | ||||||
| Cash and Cash Equivalents, end of period | $ | 1,949,640 | $ | 3,270,123 | ||||
*The commencement of operations of the United States Agriculture Index Fund was April 13, 2012.
See accompanying notes to condensed financial statements.
| 24 |
United States Commodity Index Funds Trust
Condensed Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2013 and 2012
United States Metals Index Fund*
| Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (536,322 | ) | $ | (30,476 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Increase in commodity futures trading account - cash and cash equivalents | (90,111 | ) | (502,795 | ) | ||||
| Unrealized (gain) loss on futures contracts | 304,932 | (329 | ) | |||||
| Increase in receivable from Sponsor | (752 | ) | (3,181 | ) | ||||
| Increase in interest receivable | (4 | ) | – | |||||
| Increase in other assets | (149 | ) | – | |||||
| Increase (decrease) in management fees payable | (297 | ) | 556 | |||||
| Increase in professional fees payable | 297 | 3,300 | ||||||
| Increase in other liabilities | 6 | 9 | ||||||
| Net cash used in operating activities | (322,400 | ) | (532,916 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Addition of units | – | 2,499,998 | ||||||
| Redemption of units | – | – | ||||||
| Net cash provided by financing activities | – | 2,499,998 | ||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (322,400 | ) | 1,967,082 | |||||
| Cash and Cash Equivalents, beginning of period | 2,136,984 | 1,000 | ||||||
| Cash and Cash Equivalents, end of period | $ | 1,814,584 | $ | 1,968,082 | ||||
*The commencement of operations of the United States Metals Index Fund was June 19, 2012.
See accompanying notes to condensed financial statements.
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United States Commodity Index Funds Trust
Condensed Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2013 and 2012
United States Commodity Index Funds Trust
| Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (46,609,849 | ) | $ | (10,659,887 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| (Increase) decrease in commodity futures trading account - cash and cash equivalents | (13,302,778 | ) | 20,588,149 | |||||
| Unrealized (gain) loss on futures contracts | 22,489,939 | (24,612,027 | ) | |||||
| (Increase) decrease in receivable from Sponsor | 64,379 | (52,678 | ) | |||||
| Increase in interest receivable | (812 | ) | (1,171 | ) | ||||
| Increase in other assets | (25,915 | ) | (14,941 | ) | ||||
| Increase (decrease) in management fees payable | 1,297 | (24,725 | ) | |||||
| Increase (decrease) in professional fees payable | (232,837 | ) | 21,969 | |||||
| Decrease in brokerage commissions payable | – | (3,380 | ) | |||||
| Increase (decrease) in other liabilities | 3,642 | (8,297 | ) | |||||
| Net cash used in operating activities | (37,612,934 | ) | (14,766,988 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Addition of units | 68,943,619 | 74,691,267 | ||||||
| Redemption of units | (11,084,301 | ) | (17,512,753 | ) | ||||
| Net cash provided by financing activities | 57,859,318 | 57,178,514 | ||||||
| Net Increase in Cash and Cash Equivalents | 20,246,384 | 42,411,526 | ||||||
| Cash and Cash Equivalents, beginning of period | 437,046,560 | 312,608,059 | ||||||
| Cash and Cash Equivalents, end of period | $ | 457,292,944 | $ | 355,019,585 | ||||
See accompanying notes to condensed financial statements.
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United States Commodity Index Funds Trust
Notes to Condensed Financial Statements
For the period ended June 30, 2013 (Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS
The United States Commodity Index Funds Trust (the “Trust”) was organized as a Delaware statutory trust on December 21, 2009. The Trust is a series trust formed pursuant to the Delaware Statutory Trust Act and includes the United States Commodity Index Fund (“USCI”), a commodity pool formed on April 1, 2010 and first made available to the public on August 10, 2010, the United States Copper Index Fund (“CPER”), a commodity pool formed on November 26, 2010 and first made available to the public on November 15, 2011, the United States Agriculture Index Fund (“USAG”), a commodity pool formed on November 26, 2010 and first made available to the public on April 13, 2012 and the United States Metals Index Fund (“USMI”), a commodity pool formed on November 26, 2010 and first made available to the public on June 19, 2012. USCI, CPER, USAG and USMI each issues units (“units”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). USCI, CPER, USAG and USMI are collectively referred to herein as the “Trust Series.” The Trust and each Trust Series operate pursuant to the Third Amended and Restated Declaration of Trust and Trust Agreement dated as of March 22, 2013 (the “Trust Agreement”). United States Commodity Funds LLC (“USCF”) is the sponsor of the Trust and the Trust Series and is also responsible for the management of the Trust and the Trust Series. For purposes of the financial statement presentation, unless specified otherwise, all references will be to the Trust Series.
USCF has the power and authority to establish and designate one or more series and to issue units thereof, from time to time as it deems necessary or desirable. USCF has exclusive power to fix and determine the relative rights and preferences as between the units of any series as to right of redemption, special and relative rights as to dividends and other distributions and on liquidation, conversion rights, and conditions under which the series shall have separate voting rights or no voting rights. The term for which the Trust is to exist commenced on the date of the filing of the Certificate of Trust, and the Trust and any Trust Series will exist in perpetuity, unless earlier terminated in accordance with the provisions of the Trust Agreement. Separate and distinct records must be maintained for each Trust Series and the assets associated with a Trust Series must be held in such separate and distinct records (directly or indirectly, including a nominee or otherwise) and accounted for in such separate and distinct records separately from the assets of any other Trust Series. Each Trust Series is separate from all other Trust Series created as series of the Trust in respect of the assets and liabilities allocated to that Trust Series and represents a separate investment portfolio of the Trust.
The sole Trustee of the Trust is Wilmington Trust Company (the “Trustee”), a Delaware banking corporation. The Trustee is unaffiliated with USCF. The Trustee’s duties and liabilities with respect to the offering of units and the management of the Trust are limited to its express obligations under the Trust Agreement.
USCF is a member of the National Futures Association (the “NFA”) and became a commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (the “CFTC”) effective December 1, 2005. The Trust and each Trust Series have a fiscal year ending on December 31.
USCF is also the general partner of the United States Oil Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”), the United States Gasoline Fund, LP (“UGA”) and the United States Diesel-Heating Oil Fund, LP (formerly, the United States Heating Oil Fund, LP) (“USDHO”), which listed their limited partnership units on the American Stock Exchange (the “AMEX”) under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007, “USL” on December 6, 2007, “UGA” on February 26, 2008 and “UHN” on April 9, 2008, respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of USOF’s, USNG’s, US12OF’s, UGA’s and USDHO’s units commenced trading on the NYSE Arca on November 25, 2008. USCF is also the general partner of the United States Short Oil Fund, LP (“USSO”), the United States 12 Month Natural Gas Fund, LP (“US12NG”) and the United States Brent Oil Fund, LP (“USBO”), which listed their limited partnership units on the NYSE Arca under the ticker symbols “DNO” on September 24, 2009, “UNL” on November 18, 2009 and “BNO” on June 2, 2010, respectively. All funds listed previously are referred to collectively herein as the “Related Public Funds.” USCF has also filed registration statements to register units of the United States Sugar Fund (“USSF”), the United States Natural Gas Double Inverse Fund (“UNGD”), the United States Gasoil Fund (“USGO”) and the United States Asian Commodities Basket Fund (“UAC”), each a series of the United States Commodity Funds Trust I, and the US Golden Currency Fund (“HARD”), a series of the United States Currency Funds Trust. USSF, UNGD, USGO and HARD are currently not available to the public, as such funds are still in the process of review by various regulatory agencies which have regulatory authority over USCF and such funds. UAC has been declared effective by the regulatory agencies which have regulatory authority over USCF and UAC, but at the time of the filing of this quarterly report on Form 10-Q, UAC has not been made available to the public.
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Effective as of May 1, 2012, each of USCI, CPER and USAG issue units to certain authorized purchasers (“Authorized Purchasers”) by offering baskets consisting of 50,000 units (“Creation Baskets”) through ALPS Distributors, Inc., as the marketing agent (the “Marketing Agent”). Prior to May 1, 2012, each of USCI, CPER and USAG issued units to Authorized Purchasers by offering baskets consisting of 100,000 units through the Marketing Agent. USMI was not available to the public until June 19, 2012, and from its inception of offering, issues units to certain Authorized Purchasers by offering baskets consisting of 50,000 units through the Marketing Agent. The purchase price for a Creation Basket is based upon the net asset value (“NAV”) of a unit calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket is properly received.
From July 1, 2011 through June 30, 2013 (and continuing at least through May 1, 2014), Authorized Purchasers pay USCI $350 for each order placed to create one or more Creation Baskets or to redeem one or more baskets (“Redemption Baskets”), consisting of 50,000 units; prior to July 1, 2011, this fee was $1,000. From May 1, 2012 through June 30, 2013 (and continuing at least through May 1, 2014), Authorized Purchasers pay each of CPER, USAG and USMI $350 for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets; prior to May 1, 2012, this fee was $1,000. Units may be purchased or sold on a nationally recognized securities exchange in smaller increments than a Creation Basket or Redemption Basket. Units purchased or sold on a nationally recognized securities exchange are not purchased or sold at the per unit NAV of each Trust Series but rather at market prices quoted on such exchange.
The accompanying unaudited condensed financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnote disclosure required under generally accepted accounting principles (“GAAP”) in the United States of America. The financial information included herein is unaudited; however, such financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of USCF, necessary for the fair presentation of the condensed financial statements for the interim period.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Commodity futures contracts, forward contracts, physical commodities, and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized gains or losses on open contracts are reflected in the condensed statements of financial condition and represent the difference between the original contract amount and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the condensed financial statements. Changes in the unrealized gains or losses between periods are reflected in the condensed statements of operations. Each Trust Series earns interest on its assets denominated in U.S. dollars on deposit with the futures commission merchant at the 90-day Treasury bill rate. In addition, each Trust Series earns income on funds held at the custodian and/or futures commission merchant at prevailing market rates earned on such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
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Income Taxes
The Trust Series are not subject to federal income taxes; each investor reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax return.
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), each Trust Series is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any tax related appeals or litigation processes, based on the technical merits of the position. Each Trust Series files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states. None of the Trust Series is subject to income tax return examinations by major taxing authorities for years before 2010 (year of the Trust Series’ inception, but not necessarily the commencement of operations for each Trust Series). The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in each Trust Series recording a tax liability that reduces net assets. However, each Trust Series’ conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analysis of and changes to tax laws, regulations and interpretations thereof. Each Trust Series recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the period ended June 30, 2013 for any Trust Series.
Trust Capital and Allocation of Income and Losses
Profit or loss shall be allocated among the unitholders of each Trust Series in proportion to the number of units each investor holds as of the close of each month. USCF may revise, alter or otherwise modify this method of allocation as described in the Trust Agreement.
Adoption of New Monthly Allocation Convention
Effective January 1, 2012, USCI adopted a new convention for allocating items of income, gain, loss, deduction and credits. In situations where a partner’s interest in a partnership is sold or otherwise transferred during a taxable year, the Code generally requires that partnership tax items for the year be allocated among the partners using either an interim closing of the books or a daily proration method. USCI uses an interim closing of the books method under which income, gains and losses (both realized and unrealized), deductions and credits are determined on a monthly basis. Prior to January 1, 2012, USCI allocated these tax items among the holders of the units (including those who dispose of units during a taxable year) in proportion to the number of units owned by them on the last trading day of each month. For this purpose, if an investor holds a unit as of the close of business of the last trading day of a particular month, such investor is treated as if it owned the unit throughout the month and thus is allocated all of the items of income, gain, deduction, loss or credit attributable to that unit for such month (the “same-month convention”).
Effective January 1, 2012 for USCI, November 15, 2011 for CPER, April 13, 2012 for USAG and June 19, 2012 for USMI, an allocation convention is applied pursuant to which each Trust Series’ tax items for each month will be allocated among the holders of units in proportion to the number of units owned by them as of the close of business of the last trading day of the previous month. If an investor who holds a unit as of the close of business on the last trading day of the previous month disposes of a unit during the current month, such investor will be treated for purposes of making allocations as if it owned the unit throughout the current month (the “next-month convention”). For example, an investor who buys a unit on April 10 of a year and sells it on May 20 of the same year will be allocated all of the tax items attributable to May (because he or she is deemed to hold it through the last day of May) but will not be allocated any of the tax items attributable to April. The tax items attributable to that unit for April will be allocated to the person who is the actual or deemed holder of the unit as of the close of business on the last trading day of March.
For investors in USCI, as a result of the transition from the same-month convention to the next-month convention, an investor who bought a unit in December 2011 and sold the unit on or after January 1, 2012 will be allocated the tax items attributable to that unit for December 2011 as well as the tax items attributable to that unit for 2012.
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Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in blocks of 50,000 units. Effective as of May 1, 2012, Authorized Purchasers may purchase Creation Baskets or redeem Redemption Baskets for USCI, CPER and USAG only in blocks of 50,000 units at a price equal to the NAV of the units calculated shortly after the close of the core trading session on the NYSE Arca on the day the order is placed. Prior to May 1, 2012, Authorized Purchasers could only purchase Creation Baskets or redeem Redemption Baskets for USCI, CPER and USAG in blocks of 100,000 units. USMI was not available to the public until June 19, 2012, and from its inception of offering, Authorized Purchasers could only purchase Creation Baskets in blocks of 50,000 units.
Each Trust Series receives or pays the proceeds from units sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in each Trust Series’ condensed statements of financial condition as receivable for units sold, and amounts payable to Authorized Purchasers upon redemption are reflected as payable for units redeemed.
Calculation of Net Asset Value Per Unit
Each Trust Series’ per unit NAV is calculated on each NYSE Arca trading day by taking the current market value of its total assets, subtracting any liabilities and dividing the amount by the total number of units outstanding. Each Trust Series uses the closing prices on the relevant Futures Exchanges (as defined in Note 3 below) of the Applicable Benchmark Component Futures Contracts (as defined in Note 3 below) that at any given time make up the Applicable Index (as defined in Note 3 below) (determined at the earlier of the close of such exchange or 2:30 p.m. New York time) for the contracts traded on the Futures Exchanges, but calculates or determines the value of all other investments of each Trust Series using market quotations, if available, or other information customarily used to determine the fair value of such investments.
Net Income (Loss) Per Unit
Net income (loss) per unit is the difference between the per unit NAV at the beginning of each period and the per unit NAV at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units added and redeemed based on the amount of time the units were outstanding during such period. As of June 30, 2013, USCF held 50,040 units of USMI. As of June 30, 2013, USCF held 5 units of USCI, held 40 units of CPER and held 5 units of USAG.
Offering Costs
Offering costs incurred in connection with the registration of units prior to the commencement of the offering are borne by USCF. Offering costs incurred in connection with the registration of additional units after the commencement of the offering are borne by each Trust Series. These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings. Costs borne by the Trust Series after the commencement of an offering are accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted.
Cash Equivalents
Cash equivalents include money market funds and overnight deposits or time deposits with original maturity dates of six months or less.
Use of Estimates
The preparation of condensed financial statements in conformity with GAAP requires USCF to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
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NOTE 3 - TRUST SERIES
In connection with the execution of the First Trust Agreement on April 1, 2010, USCI was designated as the first series of the Trust. USCF contributed $1,000 to the Trust upon its formation on December 21, 2009, representing an initial contribution of capital to the Trust. Following the designation of USCI as the first series of the Trust, the initial capital contribution of $1,000 was transferred from the Trust to USCI and deemed an initial contribution to USCI. In connection with the commencement of USCI’s initial offering of units, USCF received 20 Sponsor Units of USCI in exchange for the previously received capital contribution, representing a beneficial ownership interest in USCI.
On July 30, 2010, USCI received a notice of effectiveness from the SEC for its registration of 50,000,000 units on Form S-1 with the SEC. On August 10, 2010, USCI listed its units on the NYSE Arca under the ticker symbol “USCI”. USCI established its initial per unit NAV by setting the price at $50.00 and issued 100,000 units in exchange for $5,000,000 on August 10, 2010. USCI also commenced investment operations on August 10, 2010 by purchasing Futures Contracts traded on the Futures Exchanges. In order to satisfy NYSE Arca listing standards that at least 100,000 units be outstanding at the beginning of the trading day on the NYSE Arca, USCF purchased the initial Creation Basket from the initial Authorized Purchaser at the initial offering price. The $1,000 fee that would otherwise be charged to the Authorized Purchaser in connection with an order to create or redeem was waived in connection with the initial Creation Basket. USCF held such initial Creation Basket until September 3, 2010, at which time the initial Authorized Purchaser repurchased the units comprising such basket in accordance with the specified conditions noted above. On September 14, 2011, USCF redeemed the 20 Sponsor Units of USCI and, on September 19, 2011, USCF purchased five units of USCI in the open market.
In connection with the Second Amended and Restated Trust Agreement dated November 10, 2010, USMI, USAG and CPER were designated as three additional series of the Trust. Following the designation of the additional series, an initial capital contribution of $3,000 was transferred from USCF to the Trust. On November 10, 2010, the Trust transferred $1,000 to each of USMI, USAG and CPER, which was deemed a capital contribution to each series. On November 14, 2011, USCF received 40 Sponsor Units of CPER in exchange for the previously received capital contribution, representing a beneficial interest in CPER. On December 7, 2011, USCF redeemed the 40 Sponsor Units of CPER and purchased 40 units of CPER in the open market. On April 13, 2012, USCF received 40 Sponsor Units of USAG in exchange for the previously received capital contribution, representing a beneficial interest in USAG. On June 28, 2012, USCF redeemed the 40 Sponsor Units of USAG and on October 3, 2012, purchased 5 units of USAG on the open market. On June 19, 2012, USCF received 40 Sponsor Units of USMI in exchange for the previously received capital contribution, representing a beneficial interest in USMI. On August 27, 2012, USCF redeemed the 40 Sponsor Units of USMI.
CPER, USAG and USMI received notice of effectiveness from the SEC for its registration of 30,000,000 CPER units, 20,000,000 USAG units and 20,000,000 USMI units on September 6, 2011. The order to permit listing CPER, USAG and USMI on the NYSE Arca was received on October 20, 2011. On November 15, 2011, CPER listed its units on the NYSE Arca under the ticker symbol “CPER.” CPER established its initial per unit NAV by setting the price at $25.00 and issued 100,000 units to the initial authorized purchaser in exchange for $2,500,000 in cash on November 15, 2011. The $1,000 fee that would otherwise have been charged to the Authorized Purchaser in connection with an order to create or redeem was waived in connection with the initial Creation Basket.
On April 13, 2012, USAG listed its units on the NYSE Arca under the ticker symbol “USAG.” USAG established its initial per unit NAV by setting the price at $25.00. On April 14, 2012, USCF purchased two initial Creation Baskets of USAG. In accordance with applicable requirements of Regulation M under the Securities Exchange Act of 1934, no Creation Baskets were offered to Authorized Purchasers nor were the units listed on the NYSE Arca until five business days had elapsed from the date of USCF’s purchase of the initial Creation Basket on April 4, 2012. The $1,000 fee that would have otherwise been charged in connection with an order to create or redeem was waived in connection with the initial Creation Basket.
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On June 19, 2012, USMI listed its units on the NYSE Arca under the ticker symbol “USMI.” USMI established its initial per unit NAV by setting the price at $25.00. On June 11, 2012, USCF purchased two initial Creation Baskets of USMI. In accordance with applicable requirements of Regulation M under the Securities Exchange Act of 1934, no Creation Baskets were offered to Authorized Purchasers nor were the units listed on the NYSE Arca until five business days had elapsed from the date of USCF’s purchase of the initial Creation Basket on June 11, 2012. The $350 fee that would have otherwise been charged in connection with an order to create or redeem was waived in connection with the initial Creation Basket. On August 29, 2012, USCF redeemed one of two initial Creation Baskets of USMI, leaving its holdings to 50,040 units.
USCI’s Investment Objective
USCI invests in futures contracts for commodities that are currently traded on the New York Mercantile Exchange (the “NYMEX”), ICE Futures (“ICE Futures”), Chicago Board of Trade (“CBOT”), Chicago Mercantile Exchange (“CME”), London Metal Exchange (“LME”), Commodity Exchange, Inc. (“COMEX”) or on other foreign exchanges (the NYMEX, ICE Futures, CBOT, CME, LME, COMEX and other foreign exchanges, collectively, the “Futures Exchanges”) (such futures contracts, collectively, “Futures Contracts”) and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, other commodity-based contracts and instruments such as cash-settled options on Futures Contracts, forward contracts relating to commodities, cleared swap contracts and other non exchange traded (“over-the-counter”) transactions that are based on the price of commodities and Futures Contracts (collectively, “Other Commodity-Related Investments”). Market conditions that USCF currently anticipates could cause USCI to invest in Other Commodity Related Investments would be those allowing USCI to obtain greater liquidity or to execute transactions with more favorable pricing. Futures Contracts and Other Commodity-Related Investments collectively are referred to as “Commodity Interests.”
The investment objective of USCI is for the daily changes in percentage terms of its units’ per unit net asset value (“NAV”) to reflect the daily changes in percentage terms of the SummerHaven Dynamic Commodity Index Total ReturnSM (the “Commodity Index”), less USCI’s expenses. USCF does not intend to operate USCI in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Futures Contracts (as defined below) that comprise the Commodity Index or the prices of any particular group of Futures Contracts. USCI will not seek to achieve its stated investment objective over a period of time greater than one day. USCI believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Commodity-Related Investments. The Commodity Index is designed to reflect the performance of a diversified group of commodities. The Commodity Index is comprised of 14 Futures Contracts that are selected on a monthly basis from a list of 27 possible Futures Contracts. The Futures Contracts that at any given time make up the Commodity Index are referred to herein as “Benchmark Component Futures Contracts.” The Commodity Index is owned and maintained by SummerHaven Index Management, LLC (“SummerHaven Indexing”) and calculated and published by Bloomberg, L.P. USCI invests first in the current Benchmark Component Futures Contracts and other Futures Contracts intended to replicate the return on the current Benchmark Component Futures Contracts and, thereafter may hold Futures Contracts in a particular commodity other than one specified as the Benchmark Component Futures Contract, or may hold Other Commodity-Related Investments that are intended to replicate the return on the Benchmark Futures Contracts, but may fail to closely track the Commodity Index’s total return movements. If USCI increases in size, and due to its obligations to comply with regulatory limits or due to other market pricing or liquidity factors, USCI may invest in Futures Contract months other than the designated month specified as the Benchmark Component Futures Contract, or in Other Commodity-Related Investments, which may have the effect of increasing transaction related expenses and may result in increased tracking error.
USCI’s units began trading on August 10, 2010. As of June 30, 2013, USCI held 2,538 Futures Contracts on the NYMEX, 3,287 Futures Contracts on the ICE Futures, 2,819 Futures Contracts on the CBOT, 1,050 Futures Contracts on the CME and 4,968 Futures Contracts on the LME, totaling 14,662 futures contracts.
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CPER’s Investment Objective
The investment objective of CPER is for the daily changes in percentage terms of its units’ per unit NAV to reflect the daily changes in percentage terms of the SummerHaven Copper Index Total ReturnSM (the “Copper Index”), less CPER’s expenses. USCF does not intend to operate CPER in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Copper Futures Contracts (as defined below) that comprise the Copper Index or the prices of any particular group of Futures Contracts. CPER will not seek to achieve a stated investment objective over a period of time greater than one day. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Copper-Related Investments (as defined below). The Copper Index is designed to reflect the performance of the investment returns from a portfolio of copper futures contracts. The Copper Index is owned and maintained by SummerHaven Indexing and calculated and published by the NYSE Arca. The Copper Index is comprised of either two or three Eligible Copper Futures Contracts that are selected on a monthly basis based on quantitative formulas relating to the prices of the Eligible Copper Futures Contracts developed by SummerHaven Indexing. The Eligible Copper Futures Contracts that at any given time make up the Copper Index are referred to herein as “Benchmark Component Copper Futures Contracts.”
CPER seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Copper Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, CPER will invest next in other Eligible Copper Futures Contracts, and finally to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts if one or more other Eligible Copper Futures Contracts is not available. When CPER has invested to the fullest extent possible in exchange-traded futures contracts, CPER may then invest in other contracts and instruments based on the Benchmark Component Copper Futures Contracts, other Eligible Copper Futures Contracts or copper, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts and other contracts and instruments based on the Benchmark Component Copper Futures Contracts, are collectively referred to as “Other Copper-Related Investments,” and together with Benchmark Component Copper Futures Contracts and other Eligible Copper Futures Contracts, “Copper Interests.” CPER’s units began trading on November 15, 2011. As of June 30, 2013, CPER held 28 Futures Contracts on the COMEX.
USAG’s Investment Objective
The investment objective of USAG is for the daily changes in percentage terms of its units’ per unit NAV to reflect the daily changes in percentage terms of the SummerHaven Dynamic Agriculture Index Total ReturnSM (the “Agriculture Index”), less USAG’s expenses. USCF does not intend to operate USAG in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Agriculture Futures Contracts (as defined below) that comprise the Agriculture Index or the prices of any particular group of Futures Contracts. USAG will not seek to achieve its stated investment objective over a period of time greater than one day. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Agriculture-Related Investments (as defined below). The Agriculture Index is designed to reflect the performance of a diversified group of agricultural commodities. The Agriculture Index is owned and maintained by SummerHaven Indexing and calculated and published by the NYSE Arca. Futures contracts for the agricultural commodities comprising the Agriculture Index are traded on ICE Future US, ICE Futures Canada, the CBOT, the Kansas City Board of Trade (“KCBT”) and the CME and are collectively referred to herein as “Eligible Agriculture Futures Contracts.” The Agriculture Index is comprised of 14 Eligible Agriculture Futures Contracts that are selected on a monthly basis based on quantitative formulas developed by SummerHaven Indexing. The Eligible Agriculture Futures Contracts that at any given time make up the Agriculture Index are referred to herein as “Benchmark Component Agriculture Futures Contracts.” The relative weighting of the Benchmark Component Agriculture Futures Contracts will change on a monthly basis, based on quantitative formulas relating to the prices of the Benchmark Component Agriculture Futures Contracts developed by SummerHaven Indexing.
USAG seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Agriculture Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, USAG will invest next in other Eligible Agriculture Futures Contracts based on the same agricultural commodity as the futures contracts subject to such regulatory constraints or market conditions, and finally, to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts if one or more other Eligible Agriculture Futures Contracts is not available. When USAG has invested to the fullest extent possible in exchange-traded futures contracts, USAG may then invest in other contracts and instruments based on the Benchmark Component Agriculture Futures Contracts, other Eligible Agriculture Futures Contracts or the agricultural commodities included in the Agriculture Index, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts and other contracts and instruments based on the Benchmark Component Agriculture Futures Contracts, as well as metals included in the Agriculture Index, are collectively referred to as “Other Agriculture-Related Investments,” and together with Benchmark Component Agriculture Futures Contracts and other Eligible Agriculture Futures Contracts, “Agriculture Interests.” USAG’s units began trading on April 13, 2012. As of June 30, 2013, USAG held 28 Futures Contracts on the ICE Futures, 10 Futures Contracts on the CME, 4 Futures Contracts on the KCBT and 28 Futures Contracts on the CBOT, totaling 70 futures contracts.
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USMI’s Investment Objective
The investment objective of USMI is for the daily changes in percentage terms of its units’ per unit NAV to reflect the daily changes in percentage terms of the SummerHaven Metals Index Total ReturnSM (the “Metals Index”), less USMI’s expenses. USCF does not intend to operate USMI in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Metals Futures Contracts (as defined below) that comprise the Metals Index or the prices of any particular group of Futures Contracts. USMI will not seek to achieve its stated investment objective over a period of time greater than one day. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Metals-Related Investments (as defined below). The Metals Index is owned and maintained by SummerHaven Indexing and calculated and published by the NYSE Arca. Futures contracts for the metals in the Metals Index that are traded on the NYMEX, the LME and COMEX are collectively referred to herein as “Eligible Metals Futures Contracts.” The Metals Index is comprised of 10 Eligible Metals Futures Contracts that are selected on a monthly basis based on quantitative formulas developed by SummerHaven Indexing. The Eligible Metals Futures Contracts that at any given time make up the Metals Index are referred to herein as “Benchmark Component Metals Futures Contracts.” The relative weighting of the Benchmark Component Metals Futures Contracts will change on a monthly basis, based on quantitative formulas relating to the prices of the Benchmark Component Metals Futures Contracts developed by SummerHaven Indexing.
USMI seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Metals Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, USMI will invest next in other Eligible Metals Futures Contracts, and finally to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts if one or more other Eligible Metals Futures Contracts is not available. When USMI has invested to the fullest extent possible in exchange-traded futures contracts, USMI may then invest in other contracts and instruments based on the Benchmark Component Metals Futures Contracts, other Eligible Metals Futures Contracts or the metals included in the Metals Index, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts and other contracts and instruments based on the Benchmark Component Metals Futures Contracts are collectively referred to as “Other Metals-Related Investments,” and together with Benchmark Component Metals Futures Contracts and other Eligible Metals Futures Contracts, “Metals Interests.” USMI’s units began trading on June 19, 2012. As of June 30, 2013, USMI held 3 Futures Contracts on the NYMEX, 57 Futures Contracts on the LME and 13 Futures Contracts on the COMEX, totaling 73 futures contracts.
Other Defined Terms – Trust Series
The Commodity Index, the Copper Index, the Agriculture Index and the Metals Index are referred to throughout these Notes to Financial Statements collectively as the “Applicable Index” or “Indices.”
Benchmark Component Futures Contracts, Benchmark Component Copper Futures Contracts, Benchmark Component Agriculture Futures Contracts and Benchmark Component Metals Futures Contracts are referred to throughout these Notes to Financial Statements collectively as “Applicable Benchmark Component Futures Contracts.”
Other Commodity-Related Investments, Other Copper-Related Investments, Other Agriculture-Related Interests and Other Metals-Related Investments are referred to throughout these Notes to Financial Statements collectively as “Other Related Investments.”
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Trading Advisor and Trustee
The Trust Series’ trading advisor is SummerHaven Investment Management, LLC (“SummerHaven”), a Delaware limited liability company that is registered as a commodity trading advisor and CPO with the CFTC and is a member of the NFA. SummerHaven provides advisory services to USCF with respect to the Applicable Index of each Trust Series and the investment decisions of each Trust Series.
The Trustee accepts service of legal process on the Trust in the State of Delaware and makes certain filings under the Delaware Statutory Trust Act. The Trustee does not owe any other duties to the Trust, USCF or the unitholders.
NOTE 4 - FEES PAID BY USCI and CPER AND RELATED PARTY TRANSACTIONS
USCF Management Fee
Under the Trust Agreement, USCF is responsible for investing the assets of each Trust Series in accordance with the objectives and policies of each such Trust Series. In addition, USCF has arranged for one or more third parties to provide trading advisory, administrative, custody, accounting, transfer agency and other necessary services to each Trust Series. For these services, each of USCI, CPER, USAG and USMI is contractually obligated to pay USCF a fee, which is paid monthly, equal to 0.95% per annum of average daily total net assets. Effective as of May 29, 2012 (and continuing at least through May 1, 2014), USCF voluntarily waived the management fee paid by each of CPER and USAG from 0.95% per annum of average daily total net assets to 0.65% and 0.80% per annum of average daily total net assets, respectively. Effective as of May 30, 2012 (and continuing at least through May 1, 2014), USCF voluntarily waived the management fee paid by USMI from 0.95% per annum of average daily total net assets to 0.70% per annum of average daily total net assets. The reduced fee for USMI became operational as of June 19, 2012, when USMI first became listed on the NYSE Arca and will continue at least through May 1, 2014.
Trustee Fee
The Trustee is the Delaware trustee of the Trust. In connection with the Trustee’s services, USCF is responsible for paying the Trustee’s annual fee in the amount of $3,000.
Ongoing Registration Fees and Other Offering Expenses
Each Trust Series pays the costs and expenses associated with the ongoing registration of its units subsequent to the initial offering. These costs include registration or other fees paid to regulatory agencies in connection with the offer and sale of units, and all legal, accounting, printing and other expenses associated with such offer and sale. During the six months ended June 30, 2013 and 2012, none of the Trust Series incurred any registration fees or other offering expenses.
Directors’ Fees and Expenses
Each Trust Series is responsible for paying its portion of the directors’ and officers’ liability insurance for such Trust Series and the Related Public Funds. In addition, as of July 8, 2011, each Trust Series is responsible for paying the fees and expenses of the independent directors who also serve as audit committee members of the Trust Series and the Related Public Funds organized as limited partnerships. Each Trust Series shares the fees and expenses on a pro rata basis with each other Trust Series and each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses for the year ending December 31, 2013 are estimated to be a total of $560,625 for the Trust Series and the Related Public Funds.
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Investor Tax Reporting Cost
The fees and expenses associated with each Trust Series’ audit expenses and tax accounting and reporting requirements are paid by such Trust Series. These costs are estimated to be $400,000 for the year ending December 31, 2013 for USCI, $60,000 for the year ending December 31, 2013 for CPER, $60,000 for the year ending December 31, 2013 for USAG and $60,000 for the year ending December 31, 2013 for USMI.
Other Expenses and Fees and Expense Waivers
In addition to the fees described above, each Trust Series pays all brokerage fees and other expenses in connection with the operation of such Trust Series, excluding costs and expenses paid by USCF as outlined in Note 5 below. In addition, USCF has voluntarily agreed to pay certain expenses normally borne by each of CPER, USAG and USMI to the extent that such expenses exceed 0.15% (15 basis points) of each of CPER’s, USAG’s and USMI’s NAV, on an annualized basis, through at least May 1, 2014. USCF has no obligation to continue such payments into subsequent periods. For the six months ended June 30, 2013, USCF waived $47,990 in expenses for CPER, $60,094 for USAG and $60,068 for USMI. This voluntary expense waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 5.
NOTE 5 - CONTRACTS AND AGREEMENTS
USCF and the Trust, each on its own behalf and on behalf of each Trust Series, are party to a marketing agent agreement, dated as of July 22, 2010, as amended from time to time, with the Marketing Agent, whereby the Marketing Agent provides certain marketing services for each Trust Series as outlined in the agreement. The fee of the Marketing Agent, which is borne by USCF, is equal to 0.06% on each Trust Series’ assets up to $3 billion and 0.04% on each Trust Series’ assets in excess of $3 billion. In no event may the aggregate compensation paid to the Marketing Agent and any affiliate of USCF for distribution related services exceed 10% of the gross proceeds of each Trust Series’ offering.
The above fee does not include the following expenses, which are also borne by USCF: the cost of placing advertisements in various periodicals; website construction and development; or the printing and production of various marketing materials.
USCF and the Trust, on its own behalf and on behalf of each Trust Series, are also party to a custodian agreement, dated July 22, 2010, as amended from time to time, with Brown Brothers Harriman & Co. (“BBH&Co.”), whereby BBH&Co. holds investments on behalf of each Trust Series. USCF pays the fees of the custodian, which are determined by the parties from time to time. In addition, USCF and the Trust, on its own behalf and on behalf of each Trust Series, are party to an administrative agency agreement, dated July 22, 2010, as amended from time to time, with BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and registrar for each Trust Series. USCF also pays the fees of BBH&Co. for its services under such agreement and such fees are determined by the parties from time to time.
Currently, USCF pays BBH&Co. for its services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration services rendered to each Trust Series and each of the Related Public Funds, as well as a $20,000 annual fee for its transfer agency services. In addition, USCF pays BBH&Co. an asset-based charge of: (a) 0.06% for the first $500 million of USCI’s, CPER’s, USAG’s, USMI’s, USOF’s, USNG’s, US12OF’s, UGA’s, USDHO’s, USSO’s, US12NG’s and USBO’s combined net assets, (b) 0.0465% for USCI’s, CPER’s, USAG’s, USMI’s, USOF’s, USNG’s, US12OF’s, UGA’s, USDHO’s, USSO’s, US12NG’s and USBO’s combined net assets greater than $500 million but less than $1 billion, and (c) 0.035% once USCI’s, CPER’s, USAG’s, USMI’s, USOF’s, USNG’s, US12OF’s, UGA’s, USDHO’s, USSO’s, US12NG’s and USBO’s combined net assets exceed $1 billion. The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. USCF also pays transaction fees ranging from $7 to $15 per transaction.
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Each Trust Series has entered into a brokerage agreement, dated March 1, 2010 for USCI and November 18, 2011 for each of CPER, USAG and USMI, as amended from time to time, with Newedge USA, LLC (“Newedge”). The agreement requires Newedge to provide services to each Trust Series in connection with the purchase and sale of Futures Contracts and Other Related Investments that may be purchased and sold by or through Newedge for each Trust Series’ account. In accordance with the agreement, Newedge charges each Trust Series commissions of approximately $7 to $15 per round-turn trade, including applicable exchange and NFA fees for Futures Contracts and options on Futures Contracts. Such fees include those incurred when purchasing Futures Contracts and options on Futures Contracts when each Trust Series issues units as a result of a Creation Basket, as well as fees incurred when selling Futures Contacts and options on Futures Contracts when each Trust Series redeems units as a result of a Redemption Basket. Such fees are also incurred when Futures Contracts and options on Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio. Each Trust Series also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Commodity-Related Investments or short-term obligations of the United States of two years or less (“Treasuries”). During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $202,327 for USCI. Of this amount, approximately $197,063 was a result of rebalancing costs and approximately $5,264 was the result of trades necessitated by creation and redemption activity for USCI. By comparison, during the six months ended June 30, 2012, total commissions accrued to brokers amounted to $135,868 for USCI. Of this amount, approximately $131,847 was a result of rebalancing costs and approximately $4,021 was the result of trades necessitated by creation and redemption activity. The increase in the total commissions accrued to brokers by USCI for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was primarily due to an increase in USCI’s total net assets as well as an increase in the number of contracts traded during the rebalancing periods for the six months ended June 30, 2013. As an annualized percentage of average total net assets, USCI’s figure for the six months ended June 30, 2013 represents approximately 0.08% of USCI’s average total net assets. By comparison, USCI’s figure for the six months ended June 30, 2012 represented approximately 0.07% of USCI’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $400 for CPER. Of this amount, approximately $400 was a result of rebalancing costs and approximately $0 was the result of trades necessitated by creation and redemption activity for CPER. By comparison, during the six months ended June 30, 2012, total commissions accrued to brokers amounted to $319 for CPER. All of this amount was a result of rebalancing costs. The increase in CPER’s total commissions accrued to brokers for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, was primarily due to an increase in the number of contracts traded during the rebalance periods during the six months ended June 30, 2013. As an annualized percentage of average total net assets, CPER’s figure for the six months ended June 30, 2013 represents approximately 0.03% of CPER’s average total net assets. By comparison, CPER’s figure for the six months ended June 30, 2012 represented approximately 0.02% of CPER’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $1,014 for USAG. Of this amount, approximately $1,014 was a result of rebalancing costs and approximately $0 was the result of trades necessitated by creation and redemption activity for USAG. By comparison, during the six months ended June 30, 2012, total commissions accrued to brokers amounted to $976 for USAG. Of this amount, approximately $630 was a result of rebalancing costs and approximately $346 was the result of trades necessitated by creation and redemption activity. As an annualized percentage of average daily total net assets, USAG’s figure for the six months ended June 30, 2013 represents approximately 0.08% of USAG’s average daily total net assets. By comparison, USAG’s figure for the six months ended June 30, 2012 represented approximately 0.14% of USAG’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $377 for USMI. Of this amount, approximately $377 was a result of rebalancing costs and approximately $0 was the result of trades necessitated by creation and redemption activity for USMI. By comparison, during the six months ended June 30, 2012, total commissions accrued to brokers amounted to $182 for USMI. Of this amount, approximately $75 was a result of rebalancing costs and approximately $107 was the result of trades necessitated by creation and redemption activity. As an annualized percentage of average daily total net assets, USMI’s figure for the six months ended June 30, 2013 represents approximately 0.03% of USMI’s average daily total net assets. By comparison, USMI’s figure for the six months ended June 30, 2012 represented approximately 0.23% of USMI’s average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
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USCF is party to an Amended Advisory Agreement, dated July 1, 2011, as amended from time to time, with SummerHaven, whereby SummerHaven provides advisory services to USCF with respect to the Applicable Index for each Trust Series and investment decisions for each Trust Series. SummerHaven’s advisory services include, but are not limited to, general consultation regarding the calculation and maintenance of the Applicable Index for each Trust Series, anticipated changes to each Applicable Index and the nature of each Applicable Index’s current or anticipated component securities. For these services, USCF pays SummerHaven a fee based on a percentage of the average total net assets of each Trust Series. For USCI, the fee is equal to the percentage fees paid to USCF minus 0.14%, with that result multiplied by 0.5, minus 0.06% to arrive at the actual fee paid. For each of CPER, USAG and USMI, the fee is equal to the percentage fees paid to USCF minus 0.18%, with that result multiplied by 0.5, minus 0.6% to arrive at the actual fee paid.
USCF is also party to an Amended Licensing Agreement, dated July 1, 2011, as amended from time to time, with SummerHaven, whereby SummerHaven sub-licensed to each Trust Series the use of certain names and marks, including the Applicable Index for each Trust Series for which SummerHaven has a sub-license from SummerHaven Indexing, the owner of each Applicable Index. Under the Licensing Agreement, USCF paid SummerHaven an annual fee of $15,000 per each Trust Series for the year ended December 31, 2012, plus an annual fee of 0.06% of the average daily total net assets of each Trust Series.
NOTE 6 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
Each Trust Series engages in the trading of futures contracts and options on futures contracts and may engage in cleared swaps (collectively, “derivatives”). As such, each Trust Series is exposed to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure by another party to perform according to the terms of a contract.
Each Trust Series may enter into futures contracts and options on futures contracts to gain exposure to changes in the value of an underlying commodity. A futures contract obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery.
The purchase and sale of futures contracts and options on futures contracts require margin deposits with a futures commission merchant. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires a futures commission merchant to segregate all customer transactions and assets from the futures commission merchant’s proprietary activities.
Futures contracts involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure each Trust Series has in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for a futures contract.
All of the Futures Contracts held by each Trust Series were exchange-traded through June 30, 2013. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with over-the-counter transactions since, in over-the-counter transactions, a party must rely solely on the credit of its respective individual counterparties. However, in the future, if each Trust Series were to enter into non-exchange traded contracts, it would be subject to the credit risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain, if any, on the transaction. Currently, each Trust Series has credit risk under its futures contracts since the sole counterparty to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded. In addition, each Trust Series bears the risk of financial failure by the clearing broker.
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A Trust Series’ cash and other property, such as Treasuries, deposited with a futures commission merchant are considered commingled with all other customer funds, subject to the futures commission merchant’s segregation requirements. In the event of a futures commission merchant’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of a futures commission merchant could result in the complete loss of a Trust Series’ assets posted with that futures commission merchant; however, the majority of each Trust Series’ assets are held in Treasuries, cash and/or cash equivalents with the Trust Series’ custodian and would not be impacted by the insolvency of a futures commission merchant. The failure or insolvency of the Trust Series’ custodian, however, could result in a substantial loss of each Trust Series’ assets.
USCF may invest a portion of each Trust Series’ cash in money market funds that seek to maintain a stable per unit NAV. Each Trust Series may be exposed to any risk of loss associated with an investment in such money market funds. As of June 30, 2013 and December 31, 2012, none of the Trust Series held investments in money market funds. Each Trust Series holds cash deposits with its custodian. Pursuant to a written agreement with BBH&Co., uninvested overnight cash balances are swept to offshore branches of U.S. regulated and domiciled banks located in Toronto, Canada, London, United Kingdom, Grand Cayman, Cayman Islands and Nassau, Bahamas which are subject to U.S. regulation and regulatory oversight. As of June 30, 2013 and December 31, 2012, USCI held cash deposits and investments in Treasuries in the amounts of $525,418,382 and $491,119,704, respectively, with the custodian and futures commission merchant. As of June 30, 2013 and December 31, 2012, CPER held cash deposits and investments in Treasuries in the amounts of $2,304,357 and $2,541,590, respectively, with the custodian and futures commission merchant. As of June 30, 2013 and December 31, 2012, USAG held cash deposits and investments in Treasuries in the amounts of $2,399,851 and $2,679,845, respectively, with the custodian and futures commission merchant. As of June 30, 2013 and December 31, 2012, USMI held cash deposits and investments in Treasuries in the amounts of $2,372,760 and $2,605,049, respectively, with the custodian and futures commission merchant. Some or all of these amounts may be subject to loss should the Trust Series’ custodian and/or futures commission merchant cease operations.
For derivatives, risks arise from changes in the market value of the contracts. Theoretically, each Trust Series is exposed to market risk equal to the value of Futures Contracts purchased and unlimited liability on such contracts sold short. As both a buyer and a seller of options, each Trust Series pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option.
The Trust Series’ policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and procedures. In addition, the Trust Series or USCF have a policy of requiring review of the credit standing of each broker or counterparty with which they conduct business.
The financial instruments held by the applicable Trust Series are reported in its condensed statements of financial condition at market or fair value, or at carrying amounts that approximate fair value, because of their highly liquid nature and short-term maturity.
NOTE 7 - FINANCIAL HIGHLIGHTS
The following tables present per unit performance data and other supplemental financial data for each Trust Series for the six months ended June 30, 2013 and 2012 for the unitholders. This information has been derived from information presented in the condensed financial statements.
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USCI
| For the six months ended June 30, 2013 (Unaudited) |
For the six months ended June 30, 2012 (Unaudited) |
|||||||
| Per Unit Operating Performance: | ||||||||
| Net asset value, beginning of period | $ | 58.45 | $ | 58.47 | ||||
| Total income (loss) | (4.62) | (0.61) | ||||||
| Total expenses | (0.32) | (0.35) | ||||||
| Net decrease in net asset value | (4.94) | (0.96) | ||||||
| Net asset value, end of period | $ | 53.51 | $ | 57.51 | ||||
| Total Return | (8.45) | % | (1.64) | % | ||||
| Ratios to Average Net Assets | ||||||||
| Total income (loss) | (8.41) | % | (2.14) | % | ||||
| Expenses excluding management fees* | 0.20 | % | 0.21 | % | ||||
| Management fees* | 0.95 | % | 0.95 | % | ||||
| Net income (loss) | (8.98) | % | (2.72) | % | ||||
| * | Annualized. |
CPER
| For the six months ended June 30, 2013 (Unaudited) |
For the six months ended June 30, 2012 (Unaudited) |
|||||||
| Per Unit Operating Performance: | ||||||||
| Net asset value, beginning of period | $ | 25.43 | $ | 24.47 | ||||
| Total income (loss) | (4.40) | 0.25 | ||||||
| Total expenses | (0.10) | (0.14) | ||||||
| Net increase (decrease) in net asset value | (4.50) | 0.11 | ||||||
| Net asset value, end of period | $ | 20.93 | $ | 24.58 | ||||
| Total Return | (17.70) | % | 0.45 | % | ||||
| Ratios to Average Net Assets | ||||||||
| Total income (loss) | (18.44) | % | 0.97 | % | ||||
| Management fees* | 0.65 | %** | 0.90 | %** | ||||
| Total expenses excluding management fees* | 4.26 | % | 3.39 | % | ||||
| Expenses waived* | (4.06) | % | (3.20) | % | ||||
| Net expenses excluding management fees* | 0.20 | % | 0.19 | % | ||||
| Net income (loss) | (18.86) | % | 0.43 | % | ||||
| * | Annualized. |
| ** | Effective as of May 29, 2012 (and continuing at least through May 1, 2014), USCF voluntarily agreed to waive the management fee paid by CPER from 0.95% to 0.65% per annum of average daily total net assets. |
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| USAG | ||||||||
| For the six months ended June 30, 2013 (Unaudited) |
For the six months ended June 30, 2012 (Unaudited)* |
|||||||
| Per Unit Operating Performance: | ||||||||
| Net asset value, beginning of period | $ | 25.56 | $ | 25.00 | ||||
| Total income (loss) | (2.12) | 0.59 | ||||||
| Total expenses | (0.13) | (0.06) | ||||||
| Net increase (decrease) in net asset value | (2.25) | 0.53 | ||||||
| Net asset value, end of period | $ | 23.31 | $ | 25.53 | ||||
| Total Return | (8.80) | % | 2.12 | % | ||||
| Ratios to Average Net Assets | ||||||||
| Total income (loss) | (8.70) | % | 4.20 | % | ||||
| Management fees** | 0.80 | %*** | 0.88 | %*** | ||||
| Total expenses excluding management fees** | 5.22 | % | 3.33 | % | ||||
| Expenses waived** | (4.97) | % | (3.03) | % | ||||
| Net expenses excluding management fees** | 0.25 | % | 0.30 | % | ||||
| Net income (loss) | (9.22) | % | 3.94 | % | ||||
| * | USAG commenced operations on April 13, 2012. |
| ** | Annualized. |
| *** | Effective as of May 29, 2012 (and continuing at least through May 1, 2014), USCF voluntarily agreed to waive the management fee paid by USAG from 0.95% to 0.80% per annum of average daily total net assets. |
USMI
| For the six months ended June 30, 2013 (Unaudited) |
For the six months ended June 30, 2012 (Unaudited)* |
|||||||
| Per Unit Operating Performance: | ||||||||
| Net asset value, beginning of period | $ | 26.47 | $ | 25.00 | ||||
| Total income (loss) | (5.25) | (0.29) | ||||||
| Total expenses | (0.11) | (0.01) | ||||||
| Net decrease in net asset value | (5.36) | (0.30) | ||||||
| Net asset value, end of period | $ | 21.11 | $ | 24.70 | ||||
| Total Return | (20.25) | % | (1.20) | % | ||||
| Ratios to Average Net Assets | ||||||||
| Total income (loss) | (21.24) | % | (1.22) | % | ||||
| Management fees** | 0.70 | %*** | 0.70 | %*** | ||||
| Total expenses excluding management fees** | 5.10 | % | 4.39 | % | ||||
| Expenses waived** | (4.90) | % | (4.00) | % | ||||
| Net expenses excluding management fees** | 0.20 | % | 0.39 | % | ||||
| Net income (loss) | (21.68) | % | (1.26) | % | ||||
| * | USMI commenced operations on June 19, 2012. |
| ** | Annualized. |
| *** | Effective as of May 30, 2012 (and continuing at least through May 1, 2014), USCF voluntarily agreed to waive the management fee paid by USMI from 0.95% to 0.70% per annum of average daily total net assets. The reduced fee became operational as of June 19, 2012. |
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Total returns are calculated based on the change in value during the period. An individual unitholder’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from each Trust Series.
NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Trust and each Trust Series value their investments in accordance with Accounting Standards Codification 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from sources independent of the Trust and each Trust Series (observable inputs) and (2) the Trust’s and each Trust Series’ own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the ASC 820 hierarchy are as follows:
Level I – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level II – Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
Level III – Unobservable pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.
In some instances, the inputs used to measure fair value might fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.
The following table summarizes the valuation of USCI’s securities at June 30, 2013 using the fair value hierarchy:
| At June 30, 2013 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 455,171,158 | $ | 455,171,158 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| Foreign Contracts | (15,348,935) | (15,348,935) | — | — | ||||||||||||
| United States Contracts | (11,895,557) | (11,895,557) | — | — | ||||||||||||
During the six months ended June 30, 2013, there were no transfers between Level I and Level II.
The following table summarizes the valuation of USCI’s securities at December 31, 2012 using the fair value hierarchy:
| At December 31, 2012 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 435,149,105 | $ | 435,149,105 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| Foreign Contracts | 2,901,485 | 2,901,485 | — | — | ||||||||||||
| United States Contracts | (8,122,385 | ) | (8,122,385 | ) | — | — | ||||||||||
During the year ended December 31, 2012, there were no transfers between Level I and Level II.
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The following table summarizes the valuation of CPER’s securities at June 30, 2013 using the fair value hierarchy:
| At June 30, 2013 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 1,899,878 | $ | 1,899,878 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| United States Contracts | (208,250) | (208,250) | — | — | ||||||||||||
During the six months ended June 30, 2013, there were no transfers between Level I and Level II.
The following table summarizes the valuation of CPER’s securities at December 31, 2012 using the fair value hierarchy:
| At December 31, 2012 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 2,149,689 | $ | 2,149,689 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| United States Contracts | 6,575 | 6,575 | — | — | ||||||||||||
During the year ended December 31, 2012, there were no transfers between Level I and Level II.
The following table summarizes the valuation of USAG’s securities at June 30, 2013 using the fair value hierarchy:
| At June 30, 2013 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 2,149,846 | $ | 2,149,846 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| Foreign Contracts | (12,937) | (12,937) | — | — | ||||||||||||
| United States Contracts | (52,808) | (52,808) | — | — | ||||||||||||
During the six months ended June 30, 2013, there were no transfers between Level I and Level II.
The following table summarizes the valuation of USAG’s securities at December 31, 2012 using the fair value hierarchy:
| At December 31, 2012 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 2,199,688 | $ | 2,199,688 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| Foreign Contracts | (31,470 | ) | (31,470 | ) | — | — | ||||||||||
| United States Contracts | (87,685 | ) | (87,685 | ) | — | — | ||||||||||
During the year ended December 31, 2012, there were no transfers between Level I and Level II.
The following table summarizes the valuation of USMI’s securities at June 30, 2013 using the fair value hierarchy:
| At June 30, 2013 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 2,099,898 | $ | 2,099,898 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| Foreign Contracts | (128,329) | (128,329) | — | — | ||||||||||||
| United States Contracts | (130,545) | (130,545) | — | — | ||||||||||||
During the six months ended June 30, 2013, there were no transfers between Level I and Level II.
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The following table summarizes the valuation of USMI’s securities at December 31, 2012 using the fair value hierarchy:
| At December 31, 2012 | Total | Level I | Level II | Level III | ||||||||||||
| Short-Term Investments | $ | 2,349,792 | $ | 2,349,792 | $ | — | $ | — | ||||||||
| Exchange-Traded Futures Contracts | ||||||||||||||||
| Foreign Contracts | 77,393 | 77,393 | — | — | ||||||||||||
| United States Contracts | (31,335 | ) | (31,335 | ) | — | — | ||||||||||
During the year ended December 31, 2012 there were no transfers between Level I and Level II.
The Trust and each Trust Series have adopted the provisions of Accounting Standards Codification 815 – Derivatives and Hedging, which require presentation of qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivatives.
Fair Value of Derivative Instruments Held by USCI
| Derivatives not Accounted for as Hedging Instruments | Condensed Statements of Financial Condition Location | Fair Value At June 30, 2013 | Fair Value At December 31, 2012 | |||||||
| Futures - Commodity Contracts | Assets | $ | (27,244,492 | ) | $ | (5,220,900 | ) | |||
Fair Value of Derivative Instruments Held by CPER
| Derivatives not Accounted for as Hedging Instruments |
Condensed Statements of Financial Condition Location |
Fair Value At June 30, 2013 |
Fair Value At December 31, 2012 |
|||||||
| Futures - Commodity Contracts | Assets | $ | (208,250) | $ | 6,575 | |||||
Fair Value of Derivative Instruments Held by USAG
| Derivatives not Accounted for as Hedging Instruments |
Condensed Statements of Financial Condition Location |
Fair Value At June 30, 2013 |
Fair Value At December 31, 2012 |
|||||||
| Futures - Commodity Contracts | Assets | $ | (65,745) | $ | (119,155 | ) | ||||
Fair Value of Derivative Instruments Held by USMI
| Derivatives not Accounted for as Hedging Instruments |
Condensed Statements of Financial Condition Location |
Fair Value At June 30, 2013 |
Fair Value At December 31, 2012 |
|||||||
| Futures - Commodity Contracts | Assets | $ | (258,874) | $ | 46,058 | |||||
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The Effect of Derivative Instruments on the Condensed Statements of Operations of USCI
| For the six months ended June 30, 2013 | For the six months ended June 30, 2012 | |||||||||||||||||
| Derivatives not Accounted for as Hedging Instruments | Location of Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | |||||||||||||
| Futures - Commodity Contracts | Realized loss on closed positions | $ | (20,643,311 | ) | $ | (32,846,757 | ) | |||||||||||
| Change in unrealized gain (loss) on open positions | $ | (22,023,592 | ) | $ | 24,258,357 | |||||||||||||
The Effect of Derivative Instruments on the Condensed Statements of Operations of CPER
| For the six months ended June 30, 2013 | For the six months ended June 30, 2012 | |||||||||||||||||
| Derivatives not Accounted for as Hedging Instruments | Location of Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | |||||||||||||
| Futures - Commodity Contracts | Realized loss on closed positions | $ | (225,525 | ) | $ | (82,425 | ) | |||||||||||
| Change in unrealized gain (loss) on open positions | $ | (214,825 | ) | $ | 106,913 | |||||||||||||
The Effect of Derivative Instruments on the Condensed Statements of Operations of USAG
| For the six months ended June 30, 2013 | For the six months ended June 30, 2012* | |||||||||||||||||
| Derivatives not Accounted for as Hedging Instruments | Location of Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | |||||||||||||
| Futures - Commodity Contracts | Realized loss on closed positions | $ | (266,054 | ) | $ | (114,435 | ) | |||||||||||
| Change in unrealized gain on open positions | $ | 53,410 | $ | 246,428 | ||||||||||||||
* USAG commenced operations on April 13, 2012.
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The Effect of Derivative Instruments on the Condensed Statements of Operations of USMI
| For the six months ended June 30, 2013 | For the six months ended June 30, 2012* | |||||||||||||||||
| Derivatives not Accounted for as Hedging Instruments | Location of Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | Realized Gain or (Loss) on Derivatives Recognized in Income | Change in Unrealized Gain or (Loss) on Derivatives Recognized in Income | |||||||||||||
| Futures - Commodity Contracts | Realized loss on closed positions | $ | (221,153 | ) | $ | (30,006 | ) | |||||||||||
| Change in unrealized gain (loss) on open positions | $ | (304,932 | ) | $ | 329 | |||||||||||||
* USMI commenced operations on June 19, 2012.
NOTE 9 – SUBSEQUENT EVENTS
The Trust and each Trust Series have performed an evaluation of subsequent events through the date the condensed financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the condensed financial statements and the notes thereto of the United States Commodity Index Funds Trust (the “Trust”) included elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Information
This quarterly report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties and other factors that may cause the Trust’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe the Trust’s future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project,” the negative of these words, other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and the Trust cannot assure investors that the projections included in these forward-looking statements will come to pass. The Trust’s actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.
The Trust has based the forward-looking statements included in this quarterly report on Form 10-Q on information available to it on the date of this quarterly report on Form 10-Q, and the Trust assumes no obligation to update any such forward-looking statements. Although the Trust undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised to consult any additional disclosures that the Trust may make directly to them or through reports that the Trust in the future files with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Introduction
The United States Commodity Index Fund (“USCI”), the United States Copper Index Fund (“CPER”), the United States Agriculture Index Fund (“USAG”) and the United States Metals Index Fund (“USMI”) are each a commodity pool that issues units representing fractional undivided beneficial interests in USCI, CPER, USAG and USMI, respectively (“units”), that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). USCI, CPER, USAG and USMI are series of the Trust, a Delaware statutory trust formed on December 21, 2009. USCI, CPER, USAG and USMI are collectively referred to herein as the “Trust Series.” The Trust and each Trust Series operate pursuant to the Trust’s Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”), dated March 22, 2013. Wilmington Trust Company (the “Trustee”), a Delaware banking corporation, is the Delaware trustee of the Trust. The Trust and each Trust Series are managed and controlled by United States Commodity Funds LLC (“USCF”).
United States Commodity Index Fund
USCI invests in futures contracts for commodities that are traded on the New York Mercantile Exchange (the “NYMEX”), ICE Futures (“ICE Futures”), Chicago Board of Trade (“CBOT”), Chicago Mercantile Exchange (“CME”), London Metal Exchange (“LME”), Commodity Exchange, Inc. (“COMEX”) or on other foreign exchanges (such exchanges, collectively, the “Futures Exchanges”) (such futures contracts, collectively, “Futures Contracts”) and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, other commodity-based contracts and instruments such as cash-settled options on Futures Contracts, forward contracts relating to commodities, cleared swap contracts and other over-the-counter transactions that are based on the price of commodities and Futures Contracts (collectively, “Other Commodity-Related Investments”). Market conditions that USCF currently anticipates could cause USCI to invest in Other Commodity Related Investments would be those allowing USCI to obtain greater liquidity or to execute transactions with more favorable pricing.
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The investment objective of USCI is for the daily changes in percentage terms of its units’ per unit net asset value (“NAV”) to reflect the daily changes in percentage terms of the SummerHaven Dynamic Commodity Index Total ReturnSM (the “Commodity Index”), less USCI’s expenses. USCF does not intend to operate USCI in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Futures Contracts (as defined below) that comprise the Commodity Index or the prices of any particular group of Futures Contracts. The Commodity Index is owned and maintained by SummerHaven Index Management, LLC (“SummerHaven Indexing”) and calculated and published by the NYSE Arca. The Commodity Index is comprised of 14 Futures Contracts that are selected on a monthly basis from a list of 27 possible Futures Contracts. The Futures Contracts that at any given time make up the Commodity Index are referred to herein as “Benchmark Component Futures Contracts.” USCI invests first in the current Benchmark Component Futures Contracts and other Futures Contracts intended to replicate the return on the current Benchmark Component Futures Contracts and, thereafter may hold Futures Contracts in a particular commodity other than one specified as the Benchmark Component Futures Contract, or may hold Other Commodity-Related Investments that may fail to closely track the Commodity Index’s total return movements. If USCI increases in size, and due to its obligations to comply with regulatory limits or due to other market pricing or liquidity factors, USCI may invest in Futures Contract months other than the designated month specified as the Benchmark Component Futures Contract, or in Other Commodity-Related Investments, which may have the effect of increasing transaction related expenses and may result in increased tracking error.
USCI seeks to achieve its investment objective by investing in Futures Contracts and Other Commodity-Related Investments such that daily changes in its per unit NAV closely track the daily changes in the price of the Commodity Index. USCI’s positions in Commodity Interests are rebalanced on a monthly basis in order to track the changing nature of the Commodity Index. If Futures Contracts relating to a particular commodity remain in the Commodity Index from one month to the next, such Futures Contracts are rebalanced to the 7.14% target weight. Specifically, on a specified day near the end of each month (the “Selection Date”), it will be determined if a current Benchmark Component Futures Contract will be replaced by a new Futures Contract in either the same or different underlying commodity as a Benchmark Component Futures Contract for the following month, in which case USCI’s investments would have to be changed accordingly. In order that USCI’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 Futures Contracts, USCI’s investments typically are not rebalanced entirely on a single day, but rather typically rebalanced over a period of four days. After fulfilling the margin and collateral requirements with respect to its Commodity Interests, USCF invests the remainder of USCI’s proceeds from the sale of units in short-term obligations of the United States government (“Treasuries”) or cash equivalents, and/or merely hold such assets in cash (generally in interest-bearing accounts).
United States Copper Index Fund
CPER invests in Futures Contracts for commodities that are traded on the COMEX and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, Other Copper-Related Investments (as defined below). Market conditions that USCF currently anticipates could cause CPER to invest in Other Copper-Related Investments would be those allowing CPER to obtain greater liquidity or to execute transactions with more favorable pricing.
The investment objective of CPER is for the daily changes in percentage terms of its units’ per unit NAV to reflect the daily changes in percentage terms of the SummerHaven Copper Index Total ReturnSM (the “Copper Index”), less CPER’s expenses. USCF does not intend to operate CPER in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Copper Futures Contracts (as defined below) that comprise the Copper Index or the prices of any particular group of Futures Contracts. The Copper Index is designed to reflect the performance of the investment returns form a portfolio of copper futures contracts. The Copper Index is owned and maintained by SummerHaven Indexing and calculated and published by the NYSE Arca. The Copper Index is comprised of either two or three Eligible Copper Futures Contracts that are selected on a monthly basis based on quantitative formulas relating to the prices of the Eligible Copper Futures Contracts developed by SummerHaven Indexing. The Eligible Copper Futures Contracts that at any given time make up the Copper Index are referred to herein as “Benchmark Component Copper Futures Contracts.”
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CPER seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Copper Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, CPER will invest next in other Eligible Copper Futures Contracts, and finally to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts if one or more other Eligible Copper Futures Contracts is not available. When CPER has invested to the fullest extent possible in exchange-traded futures contracts, CPER may then invest in other contracts and instruments based on the Benchmark Component Copper Futures Contracts, other Eligible Copper Futures Contracts or copper, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts and other contracts and instruments based on the Benchmark Component Copper Futures Contracts, are collectively referred to as “Other Copper-Related Investments,” and together with Benchmark Component Copper Futures Contracts and other Eligible Copper Futures Contracts, “Copper Interests.”
United States Agriculture Index Fund
USAG invests in Futures Contracts for commodities that are traded on the ICE Futures US, the ICE Futures Canada, the CBOT, the CME and the Kansas City Board of Trade (“KCBT”) and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, Other Agriculture-Related Investments (as defined below). Market conditions that USCF currently anticipates could cause USAG to invest in Other Agriculture-Related Investments would be those allowing USAG to obtain greater liquidity or to execute transactions with more favorable pricing.
The investment objective of USAG is for the daily changes in percentage terms of its units’ per unit NAV to reflect the daily changes in percentage terms of the SummerHaven Dynamic Agriculture Index Total ReturnSM (the “Agriculture Index”), less USAG’s expenses. USCF does not intend to operate USAG in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Agriculture Futures Contracts (as defined below) that comprise the Agriculture Index or the prices of any particular group of Futures Contracts. The Agriculture Index is owned and maintained by SummerHaven Indexing and calculated and published by the NYSE Arca. The Agriculture Index is comprised of fourteen Eligible Agriculture Futures Contracts that are selected on a monthly basis based on quantitative formulas developed by SummerHaven Indexing. The Eligible Agriculture Futures Contracts that at any given time make up the Agriculture Index are referred to herein as “Benchmark Component Agriculture Futures Contracts.”
USAG seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Agriculture Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, USAG will invest next in other Eligible Agriculture Futures Contracts, and finally to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts if one or more other Eligible Agriculture Futures Contracts is not available. When USAG has invested to the fullest extent possible in exchange-traded futures contracts, USAG may then invest in other contracts and instruments based on the Benchmark Component Agriculture Futures Contracts, other Eligible Agriculture Futures Contracts or the agricultural commodities included in the Agriculture Index, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts and other contracts and instruments based on the Benchmark Component Agriculture Futures Contracts, are collectively referred to as “Other Agriculture-Related Investments,” and together with Benchmark Component Agriculture Futures Contracts and other Eligible Agriculture Futures Contracts, “Agriculture Interests.”
United States Metals Index Fund
USMI invests in Futures Contracts for commodities that are traded on the NYMEX, the LME and the COMEX and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, Other Metals-Related Investments (as defined below). Market conditions that USCF currently anticipates could cause USMI to invest in Other Metals-Related Investments would be those allowing USMI to obtain greater liquidity or to execute transactions with more favorable pricing.
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The investment objective of USMI is for the daily changes in percentage terms of its units’ per unit NAV to reflect the daily changes in percentage terms of the SummerHaven Metals Index Total ReturnSM (the “Metals Index”), less USMI’s expenses. USCF does not intend to operate USMI in a fashion such that its per unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Metals Futures Contracts (as defined below) that comprise the Metals Index or the prices of any particular group of Futures Contracts. The Metals Index is owned and maintained by SummerHaven Indexing and calculated and published by the NYSE Arca. The Metals Index is comprised of ten Eligible Metals Futures Contracts that are selected on a monthly basis based on quantitative formulas developed by SummerHaven Indexing. The Eligible Metals Futures Contracts that at any given time make up the Metals Index are referred to herein as “Benchmark Component Metals Futures Contracts.”
USMI seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Metals Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, USMI will invest next in other Eligible Metals Futures Contracts, and finally to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts if one or more other Eligible Metals Futures Contracts is not available. When USMI has invested to the fullest extent possible in exchange-traded futures contracts, USMI may then invest in other contracts and instruments based on the Benchmark Component Metals Futures Contracts, other Eligible Metals Futures Contracts or the metals included in the Metals Index, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts and other contracts and instruments based on the Benchmark Component Metals Futures Contracts are collectively referred to as “Other Metals-Related Investments,” and together with Benchmark Component Metals Futures Contracts and other Eligible Metals Futures Contracts, “Metals Interests.”
Other Defined Terms
The Copper Index, together with the Commodity Index, the Agriculture Index and the Metals Index are referred to throughout this quarterly report on Form 10-Q collectively as the “Applicable Index” or “Indices.”
Benchmark Component Futures Contracts, Benchmark Component Copper Futures Contracts, Benchmark Component Agriculture Futures Contracts and Benchmark Component Metals Futures Contracts are referred to throughout this quarterly report on Form 10-Q collectively as “Applicable Benchmark Component Futures Contracts.”
Other Commodity-Related Investments, Other Copper-Related Investments, Other Agriculture-Related Investments and Other Metals-Related Investments are collectively referred to herein as “Other Related Investments.” Commodity Interests, Copper Interests, Agriculture Interests and Metals Interests are collectively referred to herein as “Applicable Interests.”
Futures Contracts and Other Commodity Related Investments are collectively referred to as “Commodity Interests” in this quarterly report on Form 10-Q.
Regulatory Disclosure
Impact of Accountability Levels, Position Limits and Price Fluctuation Limits. Futures contracts include typical and significant characteristics. Most significantly, the Commodity Futures Trading Commission (the “CFTC”) and the futures exchanges have established accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which is not applicable to the Trust Series’ investments) may hold, own or control. The net position is the difference between an individual or firm’s open long contracts and open short contracts in any one commodity. In addition, most U.S.-based futures exchanges limit the daily price fluctuation for futures contracts. Currently, the ICE Futures imposes position and accountability limits that are similar to those imposed by U.S.-based futures exchanges and also limits the maximum daily price fluctuation, while some other non-U.S. futures exchanges have not adopted such limits.
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The accountability levels for the commodities comprising an Applicable Index and other futures contracts traded on U.S.-based futures exchanges are not a fixed ceiling, but rather a threshold above which such exchanges may exercise greater scrutiny and control over an investor’s positions. As of June 30, 2013, USCI held 2,538 Futures Contracts on the NYMEX, 3,287 Futures Contracts on ICE Futures, 2,819 Futures Contracts on CBOT, 1,050 Futures Contracts on CME and 4,968 Futures Contracts on LME. CPER held 28 Futures Contracts on COMEX. USAG held 28 Futures Contracts on ICE Futures, 10 Futures Contracts on CME, 4 Futures Contracts on KCBT and 28 Futures Contracts on CBOT and USMI held 3 Futures Contracts on NYMEX, 57 Futures Contracts on LME and 13 Futures Contracts on COMEX. For the six months ended June 30, 2013, no Trust Series exceeded accountability levels imposed by the NYMEX, COMEX, CME, CBOT, KCBT or ICE Futures.
Position limits differ from accountability levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that may apply at any time, the Futures Exchanges may impose position limits on contracts held in the last few days of trading in the near month contract to expire. It is unlikely that a Trust Series will run up against such position limits. A Trust Series does not typically hold the near month contract in its Applicable Benchmark Component Futures Contracts. In addition, each Trust Series’ investment strategy is to close out its positions during each Rebalancing Period in advance of the period right before expiration and purchase new contracts. As such, none of the Trust Series anticipates that position limits that apply to the last few days prior to a contract’s expiration will impact it. For the six months ended June 30, 2013, no Trust Series exceeded position limits imposed by the NYMEX, COMEX, CME, CBOT, KCBT or ICE Futures.
The regulation of commodity interest trading in the United States and other countries is an evolving area of the law, as exemplified by the various discussions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of the CFTC, the National Futures Association (the “NFA”), the futures exchanges, clearing organizations and other regulatory bodies. Pending final resolution of all applicable regulatory requirements, some specific examples of how the new Dodd-Frank Act provisions and rules adopted thereunder could impact the Trust are discussed below.
Futures Contracts and Position Limits
The CFTC is prohibited by statute from regulating trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing of non-U.S. futures contracts in the United States. These regulations permit certain contracts on non-U.S. exchanges to be offered and sold in the United States.
In October 2011, the CFTC finalized the Position Limit Rules, which were scheduled to become effective on October 12, 2012. However, on September 28, 2012, the United States District Court for the District of Columbia vacated these regulations on the basis of ambiguities in the provisions of the CEA (as modified by the Dodd-Frank Act) upon which the regulations were based. In its September 28, 2012 decision, the court remanded the Position Limit Rules to the CFTC with instructions to use its expertise and experience to resolve the ambiguities in the statute. On November 15, 2012, the CFTC indicated that it will move forward with an appeal of the District Court’s decision to vacate the Position Limit Rules. At this time, it is not possible to predict how the CFTC’s appeal could affect the Trust Series, but it may be substantial and adverse. Furthermore, until such time as the appeal is resolved or, if applicable revisions to the Position Limit Rules are proposed and adopted, the regulatory architecture in effect prior to the enactment of the Position Limit Rules will govern transactions in commodities and related derivatives (collectively, “Referenced Contracts”). Under that system, the CFTC enforces federal limits on speculation in agricultural products (e.g., corn, wheat and soy), while futures exchanges enforce position limits and accountability levels for agricultural and certain energy products (e.g., oil and natural gas). As a result, the Trust Series may be limited with respect to the size of its investments in any commodities subject to these limits. Finally, subject to certain narrow exceptions, the vacated Position Limit Rules would have required the aggregation, for purposes of the position limits, of all positions in the 28 Referenced Contracts held by a single entity and its affiliates, regardless of whether such position existed on U.S. futures exchanges, non-U.S. futures exchanges, in cleared swaps or in over-the-counter swaps. The CFTC is presently considering new aggregation rules, under a rulemaking proposal that is distinct from the Position Limit Rules. At this time, it is unclear how any modified aggregation rules may affect a Trust Series, but it may be substantial and adverse. By way of example, the aggregation rules in combination with any potential revised Position Limit Rules may negatively impact the ability of a Trust Series to meet its investment objectives through limits that may inhibit USCF’s ability to sell additional Creation Baskets of a Trust Series.
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Based on its current understanding of the final position limit regulations, USCF does not anticipate significant negative impact on the ability of the Trust Series to achieve their investment objectives.
“Swap” Transactions
The Dodd-Frank Act imposes new regulatory requirements on certain “swap” transactions that a Trust Series is authorized to engage in that may ultimately impact the ability of a Trust Series to meet its investment objective. On August 13, 2012, the CFTC and the SEC published joint final rules defining the terms “swap” and “security-based swaps.” The term “swap” is broadly defined to include various types of over-the-counter derivatives, including swaps and options. The effective date of these final rules was October 12, 2012.
The Dodd-Frank Act requires that certain transactions ultimately falling within the definition of “swap” be executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing organizations (which are referred to in the Dodd-Frank Act as “derivative clearing organizations” (“DCOs”)), if the CFTC mandates the central clearing of a particular contract. On November 28, 2012, the CFTC issued its final clearing determination requiring that certain credit default swaps and interest rate swaps be cleared by registered DCOs. This is the CFTC’s first clearing determination under the Dodd-Frank Act and became effective on February 11, 2013. Beginning on March 11, 2013, “swap dealers,” “major swap participants” and certain active funds were required to clear certain credit default swaps and interest rate swaps; and beginning on June 10, 2013, commodity pools, certain private funds and entities predominantly engaged in financial activities were required to clear the same types of swaps. As a result, if a Trust Series enters into or has entered into certain interest rate and credit default swaps on or after June 10, 2013, such swaps will be required to be centrally cleared. Determination on other types of swaps are expected in the future, and, when finalized, could require each Trust Series to centrally clear certain over-the-counter instruments presently entered into and settled on a bi-lateral basis. If a swap is required to be cleared, the initial margin will be set by the clearing organization, subject to certain regulatory requirements and guidelines. Initial and variation margin requirements for swap dealers and major swap participants who enter into uncleared swaps and capital requirements for swap dealers and major swap participants who enter into both cleared and uncleared trades will be set by the CFTC, the SEC or the applicable “Prudential Regulator.”
On April 11, 2013, the CFTC published a final rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement. The rule permits affiliated counterparties to elect not to clear a swap subject to the clearing requirement if, among other things, the counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements and whose swaps are documented and subject to a centralized risk management program. However, the exemption does not apply to swaps entered into by affiliated counterparties with unaffiliated counterparties.
On November 14, 2012, the CFTC proposed new regulations that would require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures and auditing and examination programs for FCMs. The proposed rules are intended to afford greater assurances to market participants that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of the risks of futures trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust manner, the capital and liquidity of FCMs are strengthened to safeguard their continued operations and the auditing and examination programs of the CFTC and the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner. The final regulations have not yet been adopted.
Additionally, the CFTC published rules on February 17, 2012 and April 3, 2012 that require “swap dealers” and “major swap participants” to: 1) adhere to business conduct standards, 2) implement policies and procedures to ensure compliance with the CEA and 3) maintain records of such compliance. These new requirements may impact the documentation requirements for both cleared and non-cleared swaps and cause swap dealers and major swap participants to face increased compliance costs that, in turn, may be passed along to counterparties (such as a Trust Series) in the form of higher fees and expenses that related to trading swaps. On July 27, 2013, the Division of Swap Dealer and Intermediary Oversight issued a time-limited no-action letter delaying the implementation of some of the documentation requirements placed on “swap dealers” and “major swap participants” for certain foreign-exchange forwards and swaps until September 1, 2013.
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On April 5, 2013, the CFTC’s Division of Clearing and Risk issued a letter granting no-action relief from certain swap data reporting requirements for swaps entered into between affiliated counterparties. In general, the letter grants relief from, among others: real-time, historical and regular swap reporting (under Part 43, Part 45 and Part 46 of the CFTC’s regulations, respectively).
On April 9, 2013, the CFTC’s Division of Market Oversight issued a letter granting time-limited no-action relief to non-swap dealer, non-major swap participant counterparties from the real-time, regular and historical swap reporting requirements (under Part 43, Part 45 and Part 46) of the CFTC regulations, respectively). The regular reporting requirements (Part 45 of the CFTC regulations) for interest rate and credit swaps of a financial entity (including a commodity pool such as each Trust Series) began on April 10, 2013. The letter delays implementation of the reporting requirements based upon the asset class underlying the swap and the classification of the reporting counterparty. For a financial entity (including a commodity pool such as each Trust Series), regular reporting requirements for equity, foreign exchange and other commodity swaps (including swaps on agricultural and energy futures contracts) began on May 29, 2013 and reporting of all historical swaps for all asset classes begins on September 30, 2013.
The effect of the future regulatory change on each Trust Series is impossible to predict, but it could be substantial and adverse.
USCF is a limited liability company formed in Delaware on May 10, 2005, that is registered as a commodity pool operator (“CPO”) and a swaps firm (pending) with the CFTC and is a member of the National Futures Association (the “NFA”). Each Trust Series’ trading advisor is SummerHaven Investment Management, LLC (“SummerHaven”), a Delaware limited liability company that is registered as a commodity trading advisor and CPO with the CFTC and is a member of the NFA. USCF manages each Trust Series’ investments directly, using the trading advisory services of SummerHaven for guidance with respect to the Applicable Index for each Trust Series and USCF’s selection of investments on behalf of each Trust Series. USCF is also authorized to select FCMs to execute each Trust Series’ transactions in Futures Contracts and Other Related Investments.
Commodity Markets
Commodity Futures Price Movements
Six Months Ended June 30, 2013
As measured by the four major diversified commodity indexes listed below, commodity futures prices exhibited downward trend during the six months ended June 30, 2013. The table below compares the total returns of the Commodity Index to the three major diversified commodity indexes over this time period.
| SummerHaven Dynamic Commodity Index Total ReturnSM(1) | (7.63 | )% | ||
| S&P GSCI Commodity Index (GSCI®) Total Return(2) | (5.41 | )% | ||
| Dow Jones-UBS Commodity Index Total ReturnSM(2) | (10.47 | )% | ||
| Deutsche Bank Liquid Commodity Index-Optimum Yield Total ReturnTM(2) | (8.75 | )% |
| (1) | The inception date for the SummerHaven Dynamic Commodity Index Total ReturnSM is December 2009. |
| (2) | Source: Bloomberg |
The value of the Commodity Index as of December 31, 2012 was 1,726.55. As of June 30, 2013, the value of the Commodity Index was 1,594.76, down approximately 7.63% over the six months ended June 30, 2013.
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The return of approximately (7.63)% on the Commodity Index listed above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts due to the impact of trading costs and other expenses. USCI’s per unit NAV began the year at $58.45 and ended the period at $53.51 on June 30, 2013, a decrease of approximately 8.45% over the period. USCI’s per unit NAV reached its high for the period on February 5, 2013 at $60.48 and reached its low for the period on June 28, 2013 at $53.51. See “Tracking the Commodity Index” below for information about how expenses and income affect USCI’s per unit NAV.
Copper Markets
Copper Futures Price Movements
Six Months Ended June 30, 2013
As measured by the two major copper indexes, copper futures prices exhibited moderate daily swings along with an upward trend during the six months ended June 30, 2013. The table below compares the total returns of the Copper Index to the Dow Jones-UBS Copper Subindex Total Return over this time period.
| SummerHaven Copper Index Total ReturnTM(1) | (16.93) | % | ||
| Dow Jones-UBS Copper Subindex Total Return(2) | (17.48) | % |
| (1) | The inception date for the SummerHaven Copper Index Total ReturnTM is November 2010. |
| (2) | Source: Bloomberg |
The value of the Copper Index as of December 31, 2012 was 1,223.15. As of June 30, 2013, the value of the Copper Index was 1,016.09, down approximately 16.93% over the six months ended June 30, 2013.
The return of approximately (16.93)% on the Copper Index listed above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts due to the impact of trading costs and other expenses. CPER’s per unit NAV began the year at $25.43 and ended the period at $20.93 on June 30, 2013, a decrease of approximately 17.70% over the period. CPER’s per unit NAV reached its high for the period on February 1, 2013 at $26.38 and reached its low for the period on June 24, 2013 at $20.74. See “Tracking the Copper Index” for information about how expenses and income affect CPER’s per unit NAV.
Agriculture Markets
Agriculture Futures Price Movements
Six Months Ended June 30, 2013
As measured by the four major agriculture indexes listed below, agriculture futures prices exhibited moderate daily swings along with an upward trend during the six months ended June 30, 2013. The table below compares the total returns of the Agriculture Index to the three major agriculture indexes over this time period.
| SummerHaven Dynamic Agriculture Index Total ReturnSM(1) | (8.50) | % | ||
| S&P GSCI® Agriculture Index Total Return(2) | (9.03) | % | ||
| Dow Jones-UBS Agriculture Total Return Sub-indexSM(2) | (7.50) | % | ||
| Deutsche Bank Liquid Commodity Index-Optimum Yield Agriculture ReturnTM(2) | (12.74) | % |
| (1) | The inception date for the SummerHaven Dynamic Agriculture Index Total ReturnSM is September 2010. |
| (2) | Source: Bloomberg |
The value of the Agriculture Index as of December 31, 2012 was 360.61. As of June 30, 2013, the value of the Agriculture Index was 329.97, down approximately 8.50% over the six months ended June 30, 2013.
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The return of approximately (8.50)% on the Agriculture Index listed above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts due to the impact of trading costs and other expenses. USAG’s per unit NAV began the year at $25.56 and ended the period at $23.31 on June 30, 2013, a decrease of approximately 8.80% over the period. USAG’s per unit NAV reached its high for the period on January 30, 2013 at $25.74 and reached its low for the period on June 28, 2013 at $23.31. See “Tracking the Agriculture Index” below for information about how expenses and income affect USAG’s per unit NAV.
Metals Markets
Metals Futures Price Movements
Six Months Ended June 30, 2013
As measured by the four major metals indexes listed below, metals futures prices exhibited moderate daily swings along with an upward trend during the six months ended June 30, 2013. The table below compares the total returns of the Metals Index to the three major metals indexes over this time period.
| SummerHaven Metals Index Total ReturnSM(1) | (19.88) | % | ||
| Rogers International Commodity Index®-Metals Total Return(2) | (19.33) | % | ||
| Dow Jones-UBS Industrial Metals Total Return Sub-indexSM(2) | (17.42) | % | ||
| Deutsche Bank Liquid Commodity Index-Optimum Yield Industrials Metals Total ReturnTM(2) | (14.66) | % |
| (1) | The inception date for the SummerHaven Metals Index Total ReturnSM is September 2010. |
| (2) | Source: Bloomberg |
The value of the Metals Index as December 31, 2012 was 865.68. As of June 30, 2013, the value of the Metals Index was 693.55, down approximately 19.88% over the six months ended June 30, 2013.
The return of approximately (19.88)% on the Metals Index listed above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts due to the impact of trading costs and other expenses. USMI’s per unit NAV began the year at $26.47 and ended the period at $21.11 on June 30, 2013, a decrease of approximately 20.25% over the period. USMI’s per unit NAV reached its high for the period on February 5, 2013 at $27.66 and reached its low for the period on June 26, 2013 at $20.82. See “Tracking the Metals Index” below for information about how expenses and income affect USMI’s per unit NAV.
Valuation of Futures Contracts and the Computation of the Per Unit NAV
Each Trust Series’ NAV is calculated once each NYSE Arca trading day. The per unit NAV for a particular trading day is released after 4:00 p.m. New York time. Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. The Trust Series’ Administrator uses the closing prices on the relevant Futures Exchanges of the Applicable Benchmark Component Futures Contracts (determined at the earlier of the close of such exchange or 2:30 p.m. New York time) for the contracts held on the Futures Exchanges, but calculates or determines the value of all other investments of such Trust Series using market quotations, if available, or other information customarily used to determine the fair value of such investments.
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Results of Operations
On July 30, 2010, USCI received a notice of effectiveness from the SEC for its registration of 50,000,000 units on Form S-1 with the SEC. On August 10, 2010, USCI listed its units on the NYSE Arca under the ticker symbol “USCI.” USCI established its initial offering per unit NAV by setting the price at $50.00 and issued 100,000 units to the initial authorized purchaser in exchange for $5,000,000 in cash on August 10, 2010. USCI commenced investment operations on August 10, 2010 by purchasing Futures Contracts traded on the Futures Exchanges. In order to satisfy NYSE Arca listing standards that at least 100,000 units be outstanding at the beginning of the trading day on the NYSE Arca, USCF purchased the initial Creation Basket from the initial Authorized Purchaser at the initial offering price. The $1,000 fee that would otherwise be charged to the Authorized Purchaser in connection with an order to create or redeem was waived in connection with the initial Creation Basket. USCF agreed not to resell the units comprising such basket except that it may require the initial Authorized Purchaser to repurchase all of these units at a per unit price equal to USCI’s per unit NAV within five days following written notice from USCF, subject to the conditions that: (i) on the date of repurchase, the initial Authorized Purchaser must immediately redeem these units in accordance with the terms of the Authorized Purchaser Agreement and (ii) immediately following such redemption at least 100,000 units of USCI remain outstanding. USCF held such initial Creation Basket until September 3, 2010, at which time the initial Authorized Purchaser repurchased the units comprising such basket in accordance with the specified conditions noted above. On September 14, 2011, USCF redeemed the 20 Sponsor Units of USCI, and on September 19, 2011, USCF purchased five units of USCI in the open market.
Since its initial offering of 50,000,000 units, USCI has not registered any subsequent offerings of its units. As of June 30, 2013, USCI had issued 12,550,000 units, 9,300,000 of which were outstanding. As of June 30, 2013, there were 37,450,000 units registered but not yet issued. More units may have been issued by USCI than are outstanding due to the redemption of units.
In connection with the Second Amended and Restated Trust Agreement dated November 10, 2010, USMI, USAG and CPER were designated as three additional series of the Trust. Following the designation of the additional series, an initial capital contribution of $3,000 was transferred from USCF to the Trust. On November 10, 2010, the Trust transferred $1,000 to each of USMI, USAG and CPER, which was deemed a capital contribution to each series. On November 14, 2011, USCF received 40 Sponsor Units of CPER in exchange for the previously received capital contribution, representing a beneficial interest in CPER. On December 7, 2011, USCF redeemed the 40 Sponsor Units of CPER and purchased 40 units of CPER in the open market. On April 13, 2012, USCF received 40 Sponsor Units of USAG in exchange for the previously received capital contribution, representing a beneficial interest in USAG. On June 28, 2012, USCF redeemed the 40 Sponsor units of USAG and on October 3, 2012, purchased 5 units of USAG on the open market. On June 19, 2012, USCF received 40 Sponsor Units of USMI in exchange for the previously received capital contribution, representing a beneficial interest in USMI. On August 27, 2012, USCF redeemed the 40 Sponsor units of USMI.
CPER, USAG and USMI received notice of effectiveness from the SEC for its registration of 30,000,000 CPER units, 20,000,000 USAG units and 20,000,000 USMI units on September 6, 2011. The order to permit listing CPER, USMI and USAG on the NYSE Arca was received on October 20, 2011. On November 15, 2011, CPER listed its units on the NYSE Arca under the ticker symbol “CPER.” CPER established its initial offering per unit NAV by setting the price at $25.00 and issued 100,000 units to the initial authorized purchaser in exchange for $2,500,000 in cash on November 15, 2011. The $1,000 fee that would otherwise have been charged to the Authorized Purchaser in connection with an order to create or redeem was waived in connection with the initial Creation Basket.
Since its initial offering of 30,000,000 units, CPER has not registered any subsequent offerings of its units. As of June 30, 2013, CPER had issued 150,000 units, 100,000 of which were outstanding. As of June 30, 2013, there were 29,850,000 units registered but not yet issued. More units may have been issued by CPER than are outstanding due to the redemption of units.
On April 13, 2012, USAG listed its units on the NYSE Arca under the ticker symbol “USAG.” USAG established its initial per unit NAV by setting the price at $25.00. On April 14, 2012, USCF purchased two initial Creation Baskets of USAG. In accordance with applicable requirements of Regulation M under the Securities Exchange Act of 1934, no Creation Baskets were offered to Authorized Purchasers nor were the units listed on the NYSE Arca until five business days had elapsed from the date of USCF’s purchase of the initial Creation Basket on April 4, 2012. The fee that would have otherwise been charged in connection with an order to create or redeem was waived in connection with the initial Creation Basket.
Since its initial offering of 20,000,000 units, USAG has not registered any subsequent offerings of its units. As of June 30, 2013, USAG had issued 200,000 units, 100,000 of which were outstanding. As of June 30, 2013, there were 19,850,000 units registered but not yet issued. More units may have been issued by USAG than are outstanding due to the redemption of units.
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On June 19, 2012, USMI listed its units on the NYSE Arca under the ticker symbol “USMI.” USMI established its initial per unit NAV by setting the price at $25.00. On June 11, 2012, USCF purchased two initial Creation Baskets of USMI. In accordance with applicable requirements of Regulation M under the Securities Exchange Act of 1934, no Creation Baskets were offered to Authorized Purchasers nor were the units listed on the NYSE Arca until five business days had elapsed from the date of USCF’s purchase of the initial Creation Basket on June 11, 2012. The fee that would have otherwise been charged in connection with an order to create or redeem was waived in connection with the initial Creation Basket. On August 29, 2012, USCF redeemed one of two initial Creation Baskets of USMI, leaving its holdings to 50,040 units.
Since its initial offering of 20,000,000 units, USMI has not registered any subsequent offerings of its units. As of June 30, 2013, USMI had issued 150,000 units, 100,000 of which were outstanding. As of June 30, 2013, there were 19,850,000 units registered but not yet issued. More units may have been issued by USMI than are outstanding due to the redemption of units.
Unlike funds that are registered under the 1940 Act, units that have been redeemed by the Trust Series cannot be resold. As a result, each Trust Series contemplates that additional offerings of its units will be registered with the SEC in the future in anticipation of additional issuances and redemptions.
As of June 30, 2013, USCI had the following authorized purchasers: Citadel Securities LLC, Credit Suisse Securities USA LLC, Jefferies & Company Inc., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., Newedge USA LLC and Virtu Financial BD LLC.
As of June 30, 2013, CPER had the following authorized purchasers: Credit Suisse Securities (USA) LLC, Jefferies & Company Inc., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Newedge USA LLC and Virtu Financial BD LLC.
As of June 30, 2013, USAG had the following authorized purchasers: Credit Suisse Securities (USA) LLC, Jefferies & Company Inc., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Newedge USA LLC and Virtu Financial BD LLC.
As of June 30, 2013, USMI had the following authorized purchasers: Credit Suisse Securities (USA) LLC, Jefferies & Company Inc., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Newedge USA LLC and Virtu Financial BD LLC.
For the Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012
Since USAG and USMI commenced operations on April 13, 2012 and June 19, 2012, respectively, a comparison of each of USAG’s and USMI’s results of operations for any periods prior to the six months ended June 30, 2013 has not been provided.
As of June 30, 2013, USCI’s total unrealized loss on Futures Contracts owned or held on that day was $27,244,492 and USCI established cash deposits and investments in Treasuries that were equal to $525,418,382. USCI held 85.98% of its cash assets in overnight deposits and investments in Treasuries at the custodian bank, while 14.02% of the cash balance was held as investments in Treasuries and margin deposits for the Futures Contracts purchased at the FCM. The ending per unit unit NAV on June 30, 2013 was $53.51.
By comparison, as of June 30, 2012, USCI’s total unrealized gain on Futures Contracts owned or held on that day was $1,281,665 and USCI established cash deposits and investments Treasuries that were equal to $390,329,228. USCI held 89.07% of its cash assets in overnight deposits and investments in Treasuries at its custodian bank, while 10.93% of the cash balance was held as investments in Treasuries and margin deposits for the Futures Contracts purchased at the FCM. The increase in cash assets in overnight deposits and investments in Treasuries for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, was the result of USCI’s greater size during the year ended June 30, 2013 as measured by total net assets. The ending per unit NAV on June 30, 2012 was $57.51. The decrease in the per unit NAV for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012 was primarily due to the decrease in the prices of the Futures Contracts held by USCI.
As of June 30, 2013, CPER’s total unrealized loss on Futures Contracts owned or held on that day was $208,250, and CPER established cash deposits and investments in Treasuries that were equal to $2,304,357. CPER held 77.06% of its cash assets in overnight deposits and investments in Treasuries at the custodian bank, while 22.94% of the cash balance was held as investments in Treasuries and margin deposits for the Futures Contracts purchased at the FCM. The ending per unit NAV on June 30, 2013 was $20.93.
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By comparison, as of June 30, 2012, CPER’s total unrealized gain on Futures Contracts owned or held on that day was $44,900, and CPER established cash deposits and investments in Treasuries that were equal to $2,416,394. CPER held 86.97% of its cash assets in overnight deposits and Treasuries at its custodian bank, while 13.03% of the cash balance was held as investments in Treasuries and margin deposits for the Futures Contracts purchased at the FCM. The decrease in cash assets in overnight deposits and investments in Treasuries for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, was the result of CPER’s smaller size as of June 30, 2013 as measured by total net assets. The ending per unit NAV on June 30, 2012 was $24.58. The decrease in the per unit NAV for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, was primarily due to the decrease in the prices of the Futures Contracts that CPER held.
As of June 30, 2013, USAG’s total unrealized loss on Futures Contracts owned or held on that day was $65,745, and USAG established cash deposits and investments in Treasuries that were equal to $2,399,851. USAG held 81.24% of its cash assets in overnight deposits and investments in Treasuries at the custodian bank, while 18.76% of the cash balance was held as investments in Treasuries and margin deposits for the Futures Contracts purchased at the FCM. The ending per unit NAV on June 30, 2013 was $23.31.
As of June 30, 2013, USMI’s total unrealized loss on Futures Contracts owned or held on that day was $258,874, and USMI established cash deposits and investments in Treasuries that were equal to $2,372,760. USMI held 76.48% of its cash assets in overnight deposits and investments in Treasuries at the custodian bank, while 23.52% of the cash balance was held as investments in Treasuries and margin deposits for the Futures Contracts purchased at the FCM. The ending per unit NAV on June 30, 2013 was $21.11.
Portfolio Expenses. Each Trust Series’ expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee that each Trust Series pays to USCF is calculated as a percentage of the total net assets of such Trust Series. Each Trust Series is contractually obligated to pay USCF a management fee of 0.95% of its average daily total net assets. Effective as of May 29, 2012 (and continuing through at least May 1, 2014), USCF voluntarily waived the management fee paid by each of CPER and USAG from 0.95% to 0.65% and 0.80% per annum of average daily total net assets, respectively. Effective as of May 30, 2012 (and continuing through at least May 1, 2014), USCF voluntarily waived the management fee paid by USMI from 0.95% to 0.70% per annum of average daily total net assets. The reduced fee for USMI became operational as of June 19, 2012, the date USMI became listed on the NYSE Arca. Each fee is accrued daily and paid monthly.
During the six months ended June 30, 2013, the average daily total net assets of USCI were $505,594,024. The management fee incurred by USCI during the period amounted to $2,381,833. By comparison, during the six months ended June 30, 2012, the average daily total net assets of USCI were $396,163,018. The management fee incurred by USCI during the period amounted to $1,871,492.
During the six months ended June 30, 2013, the daily average total net assets of CPER were $2,384,267. The management fee incurred by CPER during the period amounted to $7,685. By comparison, during the six months ended June 30, 2012, the average daily total net assets of CPER were $2,593,959. The management fee incurred by CPER during the period amounted to $11,616.
During the six months ended June 30, 2013, the average daily total net assets of USAG were $2,437,969. The management fee incurred by USAG during the period amounted to $9,672.
During the six months ended June 30, 2013, the average daily total net assets of USMI were $2,473,339. The management fee incurred by USMI during the period amounted to $8,586.
In addition to the management fee, each Trust Series pays all brokerage fees and other expenses, including tax reporting costs, ongoing registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”) and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The total of these fees and expenses for USCI for the six months ended June 30, 2013 was $510,011, as compared to $404,783 for the six months ended June 30, 2012. The increase in total fees and expenses excluding management fees for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was due to an increase in USCI’s commissions during the six months ended June 30, 2013, as well as an increase in other operating expenses. For the six months ended June 30, 2013 and 2012, USCI did not incur any fees or other expenses relating to the registration or offering of additional units.
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The gross total of these fees and expenses for CPER for the six months ended June 30, 2013 was $50,393, as compared to $43,701 for the six months ended June 30, 2012. The increase in gross total fees and expenses excluding management fees for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily due to an increase in certain of CPER’s operating expenses during the six months ended June 30, 2013. For the six months ended June 30, 2013 and 2012, CPER did not incur any fees or other expenses relating to the registration or offering of additional units. For the six months ended June 30, 2013 and 2012, an expense waiver was in effect which offset certain of the expenses incurred by CPER. The total amount of the expense waiver was $47,990 for the six months ended June 30, 2013 and $41,249 for the six months ended June 30, 2012. For the six months ended June 30, 2013 and 2012, the expenses of CPER, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $58,078 and $55,317, respectively, and after allowance for the expense waiver, totaled $10,088 and $14,068, respectively.
The gross total of these fees and expenses for USAG for the six months ended June 30, 2013 was $63,126. For the six months ended June 30, 2013, USAG did not incur any fees or other expenses relating to the registration or offering of additional units. For the six months ended June 30, 2013, an expense waiver was in effect which offset certain of the expenses incurred by USAG. The total amount of the expense waiver was $60,094 for the six months ended June 30, 2013. For the six months ended June 30, 2013, the expenses of USAG, including management fees, commissions and all other expenses, before allowance for the expense waiver, totaled $72,798, and after allowance for the expense waiver, totaled $12,704.
The gross total of these fees and expenses for USMI for the six months ended June 30, 2013 was $62,494. For the six months ended June 30, 2013, USMI did not incur any fees or other expenses relating to the registration or offering of additional units. For the six months ended June 30, 2013, an expense waiver was in effect which offset certain of the expenses incurred by USMI. The total amount of the expense waiver was $60,068 for the six months ended June 30, 2013. For the six months ended June 30, 2013, the expenses of USMI, including management fees, commissions and all other expenses, before allowance for the expense waiver, totaled $71,080, and after allowance for the expense waiver, totaled $11,012.
Each Trust Series is responsible for paying its portion of the directors’ and officers’ liability insurance of such Trust Series and the United States Oil Fund, LP, the United States Natural Gas Fund, LP, the United States 12 Month Oil Fund, LP, the United States Gasoline Fund, LP, the United States Diesel-Heating Oil Fund, LP (formerly, the United States Heating Oil Fund, LP), the United States Short Oil Fund, LP, the United States 12 Month Natural Gas Fund, LP and the United States Brent Oil Fund, LP (collectively, the “Related Public Funds”). In addition, as of July 8, 2011, each Trust Series is responsible for paying the fees and expenses of the independent directors who also serve as audit committee members of the Related Public Funds organized as limited partnerships. Each Trust Series shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses are estimated to be $560,625 for the year ending December 31, 2013 for the Trust Series and the Related Public Funds. By comparison, for the year ended December 31, 2012, these fees and expenses amounted to a total of $540,586 for the Trust Series and the Related Public Funds. USCI’s portion of such fees and expenses for the year ended December 31, 2012 was $68,533, CPER’s portion of such fees and expenses for the year ended December 31, 2012 was $415, USAG’s portion of such fees and expenses for the year ended December 31, 2012 was $220 and USMI’s portion of such fees and expenses for the year ended December 31, 2012 was $154.
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Each Trust Series also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Related Investments or Treasuries. During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $202,327 for USCI. Of this amount, approximately $197,063 was a result of rebalancing costs and approximately $5,264 was the result of trades necessitated by creation and redemption activity. By comparison, during the six months ended June 30, 2012, total commissions accrued to brokers amounted to $135,868 for USCI. Of this amount, approximately $131,847 was a result of rebalancing costs and approximately $4,021 was the result of trades necessitated by creation and redemption activity. The increase in the total commissions accrued to brokers by USCI for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was primarily due to an increase in USCI’s total net assets (due to net creations) as well as an increase in the number of contracts traded during the rebalancing periods for the six months ended June 30, 2013. As an annualized percentage of average total net assets, USCI’s figure for the six months ended June 30, 2013 represents approximately 0.08% of USCI’s average total net assets. By comparison, USCI’s figure for the six months ended June 30, 2012 represented approximately 0.07% of USCI’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $400 for CPER. All of this amount was a result of rebalancing costs. By comparison, during the six months ended June 30, 2012, total commissions accrued to brokers amounted to $319 for CPER. All of this amount was a result of rebalancing costs. The increase in CPER’s total commissions accrued to brokers for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, was primarily due to an increase in the number of contracts traded during the rebalance periods during the six months ended June 30, 2013. As an annualized percentage of average total net assets, CPER’s figure for the six months ended June 30, 2013 represents approximately 0.03% of CPER’s average total net assets. By comparison, CPER’s figure for the six months ended June 30, 2012 represented approximately 0.02% of CPER’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $1,014 for USAG. All of this amount was a result of rebalancing costs. As an annualized percentage of average daily total net assets, USAG’s figure for the six months ended June 30, 2013 represents approximately 0.08% of USAG’s average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the six months ended June 30, 2013, total commissions accrued to brokers amounted to $377 for USMI. All of this amount was a result of rebalancing costs. As an annualized percentage of average daily total net assets, USMI’s figure for the six months ended June 30, 2013 represents approximately 0.03% of USMI’s average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
The fees and expenses associated with each Trust Series’ audit expenses and tax accounting and reporting requirements are paid by such Trust Series. These costs are estimated to be $400,000 for the year ending December 31, 2013 for USCI, $60,000 for the year ending December 31, 2013 for CPER, $60,000 for the year ending December 31, 2013 for USAG and $60,000 for the year ending December 31, 2013 for USMI. USCF has voluntarily agreed to pay certain expenses normally borne by each of CPER, USAG and USMI to the extent that such expenses exceed 0.15% (15 basis points) of each of CPER’s, USAG’s and USMI’s NAV, on an annualized basis, through at least December 31, 2013. USCF has no obligation to continue such payments into subsequent periods. For the six months ended June 30, 2013, USCF waived $47,990, $60,094 and $60,068 for each of CPER, USAG and USMI, respectively. This voluntary expense waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 5 in Item 1 of this quarterly report on Form 10-Q.
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Interest Income. Each Trust Series seeks to invest its assets such that it holds Futures Contracts and Other Related Investments in an amount equal to the total net assets of its portfolio. Typically, such investments do not require each Trust Series to pay the full amount of the contract value at the time of purchase, but rather require each Trust Series to post an amount as a margin deposit against the eventual settlement of the contract. As a result, each Trust Series retains an amount that is approximately equal to its total net assets, which each Trust Series invests in Treasuries, cash and/or cash equivalents. This includes both the amount on deposit with the FCM as margin and in Treasuries, as well as unrestricted cash and cash equivalents held with each Trust Series’ Custodian. The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis. For the six months ended June 30, 2013, USCI earned $151,816 in interest income on such Treasuries, cash and/or cash equivalents. Based on USCI’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. USCI purchased Treasuries during the six months ended June 30, 2013 and also held cash and/or cash equivalents during this time period. By comparison, for the six months ended June 30, 2012, USCI earned $94,915 in interest income on such Treasuries, cash and/or cash equivalents. Based on USCI’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.05%. USCI purchased Treasuries during the six months ended June 30, 2012 and also held cash and/or cash equivalents during this time period. Interest rates on short-term investments held by USCI, including cash equivalents and Treasuries, were higher during the six months ended June 30, 2013 compared to the six months ended June 30, 2012. As a result, the amount of income earned by USCI as a percentage of average total net assets was higher during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.
For the six months ended June 30, 2013, CPER earned $776 in interest income on such Treasuries, cash and/or cash equivalents. Based on CPER’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. CPER purchased Treasuries during the six months ended June 30, 2013 and also held cash and/or cash equivalents during this time period. By comparison, for the six months ended June 30, 2012, CPER earned $667 in interest income on such Treasuries, cash and/or cash equivalents. Based on CPER’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.05%. CPER purchased Treasuries during the six months ended June 30, 2012 and also held cash and/or cash equivalents during this time period. Interest rates on short-term investments held by CPER, including cash equivalents and Treasuries, were higher during the six months ended June 30, 2013 compared to the six months ended June 30, 2012. As a result, the amount of income earned by CPER as a percentage of average total net assets was higher during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.
For the six months ended June 30, 2013, USAG earned $819 in interest income on such Treasuries, cash and/or cash equivalents. Based on USAG’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.07%. USAG purchased Treasuries during the six months ended June 30, 2013 and also held cash and/or cash equivalents during this time period.
For the six months ended June 30, 2013, USMI earned $769 in interest income on such Treasuries, cash and/or cash equivalents. Based on USMI’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. USMI purchased Treasuries during the six months ended June 30, 2013 and also held cash and/or cash equivalents during this time period.
For the Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012
Since USAG and USMI commenced operations on April 13, 2012 and June 19, 2012, respectively, a comparison of each of USAG’s and USMI’s results of operations for any periods prior to the three months ended June 30, 2013 has not been provided.
Portfolio Expenses. During the three months ended June 30, 2013, the average daily total net assets of USCI were $499,768,702. The management fee incurred by USCI during the period amounted to $1,183,699. By comparison, during the three months ended June 30, 2012, the average daily total net assets of USCI were $405,335,729. The management fee incurred by USCI during the period amounted to $957,412.
During the three months ended June 30, 2013, the daily average total net assets of CPER were $2,250,774. The management fee incurred by CPER during the period amounted to $3,647. By comparison, during the three months ended June 30, 2012, the average daily total net assets of CPER were $2,506,817. The management fee incurred by CPER during the period amounted to $5,283.
During the three months ended June 30, 2013, the average daily total net assets of USAG were $2,390,403. The management fee incurred by USAG during the period amounted to $4,768.
During the three months ended June 30, 2013, the average daily total net assets of USMI were $2,304,820. The management fee incurred by USMI during the period amounted to $4,023.
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In addition to the management fee, each Trust Series pays all brokerage fees and other expenses, including tax reporting costs, ongoing registration or other fees paid to the SEC, FINRA and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The total of these fees and expenses for USCI for the three months ended June 30, 2013 was $318,658, as compared to $211,040 for the three months ended June 30, 2012. The increase in total fees and expenses excluding management fees for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was due to an increase in USCI’s commissions during the three months ended June 30, 2013 as well as an increase in other operating expenses. For the three months ended June 30, 2013 and 2012, USCI did not incur any fees or other expenses relating to the registration or offering of additional units.
The gross total of these fees and expenses for CPER for the three months ended June 30, 2013 was $25,411 as compared to $21,582 for the three months ended June 30, 2012. The increase in gross total fees and expenses excluding management fees for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was primarily due to an increase in certain of CPER’s operating expenses during the three months ended June 30, 2013. For the three months ended June 30, 2013 and 2012, CPER did not incur any fees or other expenses relating to the registration or offering of additional units. For the three months ended June 30, 2013 and 2012, an expense waiver was in effect which offset certain of the expenses incurred by CPER. The total amount of the expense waiver was $24,095 for the three months ended June 30, 2013 and $20,257 for the three months ended June 30, 2012. For the three months ended June 30, 2013 and 2012, the expenses of CPER, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $29,058 and $26,865, respectively, and after allowance for the expense waiver, totaled $4,963 and $6,608, respectively.
The gross total of these fees and expenses for USAG for the three months ended June 30, 2013 was $31,693. For the three months ended June 30, 2013, USAG did not incur any fees or other expenses relating to the registration or offering of additional units. For the three months ended June 30, 2013, an expense waiver was in effect which offset certain of the expenses incurred by USAG. The total amount of the expense waiver was $30,231 for the three months ended June 30, 2013. For the three months ended June 30, 2013, the expenses of USAG, including management fees, commissions and all other expenses, before allowance for the expense waiver, totaled $36,461, and after allowance for the expense waiver, totaled $6,230.
The gross total of these fees and expenses for USMI for the three months ended June 30, 2013 was $31,381. For the three months ended June 30, 2013, USMI did not incur any fees or other expenses relating to the registration or offering of additional units. For the three months ended June 30, 2013, an expense waiver was in effect which offset certain of the expenses incurred by USMI. The total amount of the expense waiver was $30,264 for the three months ended June 30, 2013. For the three months ended June 30, 2013, the expenses of USMI, including management fees, commissions and all other expenses, before allowance for the expense waiver, totaled $35,404, and after allowance for the expense waiver, totaled $5,140.
Each Trust Series is responsible for paying its portion of the directors’ and officers’ liability insurance of such Trust Series and the Related Public Funds. In addition, as of July 8, 2011, each Trust Series is responsible for paying the fees and expenses of the independent directors who also serve as audit committee members of the Related Public Funds organized as limited partnerships. Each Trust Series shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses are estimated to be $560,625 for the year ending December 31, 2013 for the Trust Series and the Related Public Funds. By comparison, for the year ended December 31, 2012, these fees and expenses amounted to a total of $540,586 for the Trust Series and the Related Public Funds. USCI’s portion of such fees and expenses was $68,533, CPER’s portion of such fees and expenses for the year ended December 31, 2012 was $415, USAG’s portion of such fees and expenses for the year ended December 31, 2012 was $220 and USMI’s portion of such fees and expenses for the year ended December 31, 2012 was $154.
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Each Trust Series also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Related Investments or Treasuries. During the three months ended June 30, 2013, total commissions accrued to brokers amounted to $109,715 for USCI. Of this amount, approximately $106,859 was a result of rebalancing costs and approximately $2,856 was the result of trades necessitated by creation and redemption activity. By comparison, during the three months ended June 30, 2012, total commissions accrued to brokers amounted to $66,909 for USCI. Of this amount, approximately $64,979 was a result of rebalancing costs and approximately $1,930 was the result of trades necessitated by creation and redemption activity. The increase in the total commissions accrued to brokers by USCI for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 was primarily due to an increase in USCI’s total net assets as well as an increase in the number of contracts traded during the rebalancing periods for the three months ended June 30, 2013. As an annualized percentage of average total net assets, USCI’s figure for the three months ended June 30, 2013 represents approximately 0.09% of USCI’s average total net assets. By comparison, USCI’s figure for the three months ended June 30, 2012 represented approximately 0.07% of USCI’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the three months ended June 30, 2013, total commissions accrued to brokers amounted to $354 for CPER. All of this amount was a result of rebalancing costs. By comparison, during the three months ended June 30, 2012, total commissions accrued to brokers amounted to $277 for CPER. All of this amount was a result of rebalancing costs. The increase in CPER’s total commissions accrued to brokers for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, was primarily due to a slight increase in the number of contracts traded during the rebalance periods during the three months ended June 30, 2013. As an annualized percentage of average total net assets, CPER’s figure for the three months ended June 30, 2013 represents approximately 0.06% of CPER’s average total net assets. By comparison, CPER’s figure for the three months ended June 30, 2012 represented approximately 0.04% of CPER’s average total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the three months ended June 30, 2013, total commissions accrued to brokers amounted to $443 for USAG. All of this amount was a result of rebalancing costs. As an annualized percentage of average daily total net assets, USAG’s figure for the three months ended June 30, 2013 represents approximately 0.08% of USAG’s average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
During the three months ended June 30, 2013, total commissions accrued to brokers amounted to $131 for USMI. All of this amount was a result of rebalancing costs. As an annualized percentage of average daily total net assets, USMI’s figure for the three months ended June 30, 2013 represents approximately 0.02% of USMI’s average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.
The fees and expenses associated with each Trust Series’ audit expenses and tax accounting and reporting requirements are paid by such Trust Series. These costs are estimated to be $400,000 for the year ending December 31, 2013 for USCI, $60,000 for the year ending December 31, 2013 for CPER, $60,000 for the year ending December 31, 2013 for USAG and $60,000 for the year ending December 31, 2013 for USMI. USCF has voluntarily agreed to pay certain expenses normally borne by each of CPER, USAG and USMI to the extent that such expenses exceed 0.15% (15 basis points) of each of CPER’s, USAG’s and USMI’s NAV, on an annualized basis, through at least December 31, 2013. USCF has no obligation to continue such payments into subsequent periods. For the three months ended June 30, 2013, USCF waived $24,095, $30,231 and $30,264 for each of CPER, USAG and USMI, respectively. This voluntary expense waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 5 in Item 1 of this quarterly report on Form 10-Q.
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Interest Income. Each Trust Series seeks to invest its assets such that it holds Futures Contracts and Other Related Investments in an amount equal to the total net assets of its portfolio. Typically, such investments do not require each Trust Series to pay the full amount of the contract value at the time of purchase, but rather require each Trust Series to post an amount as a margin deposit against the eventual settlement of the contract. As a result, each Trust Series retains an amount that is approximately equal to its total net assets, which each Trust Series invests in Treasuries, cash and/or cash equivalents. This includes both the amount on deposit with the FCM as margin and in Treasuries, as well as unrestricted cash and cash equivalents held with each Trust Series’ Custodian. The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis. For the three months ended June 30, 2013, USCI earned $70,020 in interest income on such Treasuries, cash and/or cash equivalents. Based on USCI’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. USCI purchased Treasuries during the three months ended June 30, 2013 and also held cash and/or cash equivalents during this time period. By comparison, for the three months ended June 30, 2012, USCI earned $57,475 in interest income on such Treasuries, cash and/or cash equivalents. Based on USCI’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. USCI purchased Treasuries during the three months ended June 30, 2012 and also held cash and/or cash equivalents during this time period. Interest rates on short-term investments, including cash equivalents and Treasuries, were essentially flat during the three months ended June 30, 2013 compared to the three months ended June 30, 2012. As a result, the amount of income earned by USCI as a percentage of average total net assets was essentially flat during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.
For the three months ended June 30, 2013, CPER earned $325 in interest income on such Treasuries, cash and/or cash equivalents. Based on CPER’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. CPER purchased Treasuries during the three months ended June 30, 2013 and also held cash and/or cash equivalents during this time period. By comparison, for the three months ended June 30, 2012, CPER earned $420 in interest income on such Treasuries, cash and/or cash equivalents. Based on CPER’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.07%. CPER purchased Treasuries during the three months ended June 30, 2012 and also held cash and/or cash equivalents during this time period. Interest rates on short-term investments, including cash equivalents and Treasuries, were lower during the three months ended June 30, 2013 compared to the three months ended June 30, 2012. As a result, the amount of income earned by CPER as a percentage of average total net assets was lower during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.
For the three months ended June 30, 2013, USAG earned $352 in interest income on such Treasuries, cash and/or cash equivalents. Based on USAG’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.06%. USAG purchased Treasuries during the three months ended June 30, 2013 and also held cash and/or cash equivalents during this time period.
For the three months ended June 30, 2013, USMI earned $323 in interest income on such Treasuries, cash and/or cash equivalents. Based on USMI’s average daily total net assets, this was equivalent to an annualized yield of approximately 0.05%. USMI purchased Treasuries during the three months ended June 30, 2013 and also held cash and/or cash equivalents during this time period.
Portfolio Holdings for USCI
During the six months ended June 30, 2013, USCI’s portfolio held at all times Futures Contracts based on 14 different commodities (except during the four days of the end-of-the-month roll period when more than 14 commodities could be represented while the portfolio re-balances). Due to changes in the composition of the Commodity Index, each month the list of Benchmark Component Futures Contracts held by USCI changed (see the section “The Commodity Index” below). The table below lists the Benchmark Component Futures Contracts held during the six months ended June 30, 2013.
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Benchmark Component Futures Contracts for USCI
| Commodity | 1/1/2013 | 2/1/2013 | 3/1/2013 | 4/1/113 | 5/1/2013 | 6/1/2013 | YTD Spot Price Performance | |||||||||||||||||||||
| Aluminum | (15.1 | )% | ||||||||||||||||||||||||||
| Crude Oil (Brent) | l | l | l | l | l | (8.1 | )% | |||||||||||||||||||||
| Cocoa | l | l | l | l | (1.9 | )% | ||||||||||||||||||||||
| Coffee | (16.6 | )% | ||||||||||||||||||||||||||
| Copper | (16.5 | )% | ||||||||||||||||||||||||||
| Corn | l | l | l | l | l | l | (2.7 | )% | ||||||||||||||||||||
| Cotton | l | l | l | 10.1 | % | |||||||||||||||||||||||
| Feeder Cattle | (1.3 | )% | ||||||||||||||||||||||||||
| Gas Oil | l | l | l | (4.7 | )% | |||||||||||||||||||||||
| Gold | l | (27.0 | )% | |||||||||||||||||||||||||
| Heating Oil | l | l | l | l | (5.4 | )% | ||||||||||||||||||||||
| Lead | l | l | l | l | l | l | (11.7 | )% | ||||||||||||||||||||
| Lean Hogs | l | l | 18.1 | % | ||||||||||||||||||||||||
| Live Cattle | l | l | l | l | l | l | (9.0 | )% | ||||||||||||||||||||
| Natural Gas | l | l | l | l | l | 6.4 | % | |||||||||||||||||||||
| Nickel | (19.7 | )% | ||||||||||||||||||||||||||
| Platinum | l | l | l | l | l | l | (13.1 | )% | ||||||||||||||||||||
| Unleaded Gasoline | l | l | l | l | (2.1 | )% | ||||||||||||||||||||||
| Silver | (35.5 | )% | ||||||||||||||||||||||||||
| Soybeans | l | l | l | l | l | l | 10.3 | % | ||||||||||||||||||||
| Soybean Meal | l | l | l | l | l | l | 16.6 | % | ||||||||||||||||||||
| Soybean Oil | l | (5.6 | )% | |||||||||||||||||||||||||
| Sugar | l | l | (16.0 | )% | ||||||||||||||||||||||||
| Tin | l | l | l | l | l | (16.1 | )% | |||||||||||||||||||||
| Wheat | l | l | l | l | l | l | (16.6 | )% | ||||||||||||||||||||
| Crude Oil (WTI) | 5.2 | % | ||||||||||||||||||||||||||
| Zinc | l | l | l | (11.0 | )% | |||||||||||||||||||||||
* From 12/31/12 to 6/30/2013 Source: Bloomberg
Investors are cautioned that the change in the spot price of a given commodity does not represent the actual return that USCI might have earned on any holdings in futures contracts based on that commodity. This is due to two factors. First, the return on a futures contract may be higher, or lower, than the change in the spot price of the commodity due to the impact of backwardation or contango. Second, USCI may not have owned any such futures contract for the entire time period represented in the table below. Thus, USCI’s total actual return on its holdings in any of the commodities shown below may be higher, or lower, than the actual change in the spot price of the particular commodity.
Tracking Each Trust Series’ Benchmark
USCF seeks to manage each Trust Series’ portfolio such that changes in its average daily per unit NAV, on a percentage basis, closely track the daily changes in the price of the Applicable Index, also on a percentage basis. Specifically, USCF seeks to manage the portfolio such that over any rolling period of 30-valuation days, the average daily change in a Trust Series’ per unit NAV is within a range of 90% to 110% (0.9 to 1.1) of the average daily change in the price of the Applicable Index. As an example, if the average daily movement of the price of the Applicable Index for a particular 30-valuation day time period was 0.50% per day, USCF would attempt to manage the portfolio such that the average daily movement of the per unit NAV during that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of the Applicable Index’s results). Each Trust Series’ portfolio management goals do not include trying to make the nominal price of its per unit NAV equal to the nominal price of the Applicable Index, the nominal price of any particular commodity Futures Contract or the spot price for any particular commodity. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in listed Futures Contracts.
USCI
For the 30-valuation days ended June 28, 2013, the simple average daily change in the Commodity Index was (0.037)%, while the simple average daily change in the per unit NAV of USCI over the same time period was (0.046)%. The average daily difference was (0.009)% (or (0.9) basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Commodity Index, the average error in daily tracking by the per unit NAV was (3.89)%, meaning that over this time period USCI’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal. The first chart below shows the daily movement of USCI’s per unit NAV versus the daily movement of the Commodity Index for the 30-valuation day period ended June 28, 2013, the last trading day in June. The second chart below shows the monthly total returns of USCI as compared to the monthly value of the Benchmark Component Futures Contracts since inception.
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Since the commencement of the offering of USCI’s units to the public on August 10, 2010 to June 30, 2013, the simple average daily change in the Commodity Index was 0.019%, while the simple average daily change in the per unit NAV of USCI over the same time period was 0.014%. The average daily difference was (0.014)% (or (1.4) basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Commodity Index, the average error in daily tracking by the per unit NAV was (5.694)%, meaning that over this time period USCI’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An alternative tracking measurement of the return performance of USCI versus the return of the Commodity Index can be calculated by comparing the actual return of USCI, measured by changes in its per unit NAV, versus the expected changes in its per unit NAV under the assumption that USCI’s returns had been exactly the same as the daily changes in the price of the Commodity Index.
For the six months ended June 30, 2013, the actual total return of USCI as measured by changes in its per unit NAV was (8.45)%. This is based on an initial per unit NAV of $58.45 as of December 31, 2012 and an ending per unit NAV as of June 30, 2013 of $53.51. During this time period, USCI made no distributions to its unitholders. However, if USCI’s daily changes in its per unit NAV had instead exactly tracked the changes in the daily total return of the Commodity Index, USCI would have had an estimated per unit NAV of $53.99 as of June 30, 2013, for a total return over the relevant time period of (7.63)%. The difference between the actual per unit NAV total return of USCI of (8.45)% and the expected total return based on the Commodity Index of (7.63)% was an error over the time period of (0.82)%, which is to say that USCI’s actual total return underperformed the Commodity Index result by that percentage. USCF believes that a portion of the difference between the actual total return and the expected Commodity Index total return can be attributed to the net impact of the expenses that USCI pays, offset in part by the income that USCI collects on its cash and cash equivalent holdings. During the six months ended June 30, 2013, USCI earned interest income of $151,816, which is equivalent to a weighted average income rate of approximately 0.06% for such period. In addition, during the six months ended June 30, 2013, USCI also collected $7,350 from its Authorized Purchasers for creating or redeeming baskets of units. This income also contributed to USCI’s actual total return. However, if the total assets of USCI continue to increase, USCF believes that the impact on actual total returns of these fees from creations and redemptions will diminish as a percentage of the actual total return. During the six months ended June 30, 2013, USCI incurred total expenses of $2,891,844. Income from interest and Authorized Purchaser collections net of expenses was $(2,732,678), which is equivalent to an annualized weighted average net income rate of approximately (1.09)% for the six months ended June 30, 2013.
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By comparison, for the six months ended June 30, 2012, the actual total return of USCI as measured by changes in its per unit NAV was (1.64)%. This is based on an initial per unit NAV of $58.47 as of December 31, 2011 and an ending per unit NAV as of June 30, 2012 of $57.51. During this time period, USCI made no distributions to its unitholders. However, if USCI’s daily changes in its per unit NAV had instead exactly tracked the changes in the daily total return of the Commodity Index, USCI would have had an estimated per unit NAV of $57.74 as of June 30, 2012, for a total return over the relevant time period of (1.25)%. The difference between the actual per unit NAV total return of USCI of (1.64)% and the expected total return based on the Commodity Index of (0.91)% was an error over the time period of (0.73)%, which is to say that USCI’s actual total return underperformed the Commodity Index result by that percentage. USCF believes that a portion of the difference between the actual total return and the expected Commodity Index total return can be attributed to the net impact of the expenses that USCI paid, offset in part by the income that USCI collects on its cash and cash equivalent holdings. During the six months ended June 30, 2012, USCI earned interest income of $94,915, which is equivalent to a weighted average income rate of approximately 0.05% for such period. In addition, during the six months ended June 30, 2012, USCI also collected $4,550 from its Authorized Purchasers for creating or redeeming baskets of units. This income also contributed to USCI’s actual total return. However, if the total assets of USCI continue to increase, USCF believes that the impact on actual total returns of these fees from creations and redemptions will diminish as a percentage of the actual total return. During the six months ended June 30, 2012, USCI incurred total expenses of $2,276,275. Income from interest and Authorized Purchaser collections net of expenses was $(2,176,810), which is equivalent to an annualized weighted average net income rate of approximately (1.10)% for the six months ended June 30, 2012.
CPER
For the 30-valuation days ended June 28, 2013, the simple average daily change in the Copper Index was (0.295)%, while the simple average daily change in the per unit NAV of CPER over the same time period was (0.268)%. The average daily difference was (0.027)% (or (2.7) basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Copper Index, the average error in daily tracking by the per unit NAV was (1.807)%, meaning that over this time period CPER’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal. The first chart below shows the daily movement of CPER’s per unit NAV versus the daily movement of the Copper Index for the 30-valuation day period ended June 28, 2013, the last trading day in June. The second chart below shows the monthly total returns of CPER as compared to the monthly value of the Benchmark Component Copper Futures Contracts since inception.
Since the commencement of the offering of CPER’s units to the public on November 15, 2011 to June 30, 2013, the simple average daily change in the Copper Index was (0.034)%, while the simple average daily change in the per unit NAV of CPER over the same time period was (0.029)%. The average daily difference was 0.005% (or 0.5 basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Copper Index, the average error in daily tracking by the per unit NAV was (2.352)%, meaning that over this time period CPER’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
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*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An alternative tracking measurement of the return performance of CPER versus the return of the Copper Index can be calculated by comparing the actual return of CPER, measured by changes in its per unit NAV, versus the expected changes in its per unit NAV under the assumption that CPER’s returns had been exactly the same as the daily changes in the price of the Copper Index.
For the six months ended June 30, 2013, the actual total return of CPER as measured by changes in its per unit NAV was (17.70)%. This is based on an initial per unit NAV of $25.43 as of December 31, 2012 and an ending per unit NAV as of June 30, 2013 of $20.93. During this time period, CPER made no distributions to its unitholders. However, if CPER’s daily changes in its per unit NAV had instead exactly tracked the changes in the daily total return of the Copper Index, CPER would have had an estimated per unit NAV of $21.13 as of June 30, 2013, for a total return over the relevant time period of (16.91)%. The difference between the actual per unit NAV total return of CPER of (17.70)% and the expected total return based on the Copper Index of (16.91)% was an error over the time period of (0.79)%, which is to say that CPER’s actual total return underperformed the Copper Index result by that percentage. USCF believes that a portion of the difference between the actual total return and the expected Copper Index total return can be attributed to the net impact of the expenses that CPER pays, offset in part by the income that CPER collects on its cash and cash equivalent holdings. During the six months ended June 30, 2013, CPER earned interest income of $776, which is equivalent to a weighted average income rate of approximately 0.06% for such period. During the six months ended June 30, 2013, CPER did not collect any fees from its Authorized Purchasers for creating or redeeming baskets of units. During the six months ended June 30, 2013, CPER incurred net expenses of $10,088. Income from interest net of expenses was $(9,312), which is equivalent to a weighted average net income rate of approximately (0.79)% for the six months ended June 30, 2013.
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By comparison, for the six months ended June 30, 2012, the actual total return of CPER as measured by changes in its per unit NAV was 0.45%. This is based on an initial per unit NAV as of $24.47 as of December 31, 2011 and an ending per unit NAV as of June 30, 2012 of $24.58. During this time period, CPER made no distributions to its unitholders. However, if CPER’s daily changes in its per unit NAV had instead exactly tracked the changes in the daily total return of the Copper Index, CPER would have had an estimated per unit NAV of $24.62 as of June 30, 2012, for a total return over the relevant time period of 0.61%. The difference between the actual per unit NAV total return of CPER of 0.45% and the expected total return based on the Copper Index of 0.61% was an error over the time period of (0.16)%, which is to say that CPER’s actual total return underperformed the Copper Index result by that percentage. USCF believes that a portion of the difference between the actual total return and the expected Copper Index total return can be attributed to the net impact of the expenses that CPER paid, offset in part by the income that CPER collects on its cash and cash equivalent holdings. During the six months ended June 30, 2012, CPER earned interest income of $667, which is equivalent to a weighted average income rate of approximately 0.05% for such period. During the six months ended June 30, 2012, CPER did not collect any fees from its Authorized Purchasers for creating or redeeming baskets of units. During the six months ended June 30, 2012, CPER incurred net expenses of $14,068. Income from interest and Authorized Purchaser collections net of expenses was $(13,401), which is equivalent to a weighted average net income rate of approximately (1.04)% for the six months ended June 30, 2012.
USAG
For the 30-valuation days ended June 28, 2013, the simple average daily change in the Agriculture Index was (0.037)%, while the simple average daily change in the per unit NAV of USAG over the same time period was (0.039)%. The average daily difference was (0.002)% (or (0.2) basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Agriculture Index, the average error in daily tracking by the per unit NAV was 6.664%, meaning that over this time period USAG’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal. The first chart below shows the daily movement of USAG’s per unit NAV versus the daily movement of the Agriculture Index for the 30-valuation day period ended June 28, 2013, the last trading day in June. The second chart below shows the monthly total returns of USAG as compared to the monthly value of the Benchmark Component Agriculture Futures Contracts since inception.
Since the commencement of the offering of USAG’s units to the public on April 13, 2012 to June 30, 2013, the simple average daily change in the Agriculture Index was (0.015)%, while the simple average daily change in the per unit NAV of USAG over the same time period was (0.0195)%. The average daily difference was (0.0045)% (or (0.45) basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Agriculture Index, the average error in daily tracking by the per unit NAV was 5.450%, meaning that over this time period USAG’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
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*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
An alternative tracking measurement of the return performance of USAG versus the return of the Agriculture Index can be calculated by comparing the actual return of USAG, measured by changes in its per unit NAV, versus the expected changes in its per unit NAV under the assumption that USAG’s returns had been exactly the same as the daily changes in the price of the Agriculture Index.
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For the six months ended June 30, 2013, the actual total return of USAG as measured by changes in its per unit NAV was (8.80)%.This is based on an initial per unit NAV of $25.56 as of December 31, 2012 and an ending per unit NAV as of June 30, 2013 of $23.31. During this time period, USAG made no distributions to its unitholders. However, if USAG’s daily changes in its per unit NAV had instead exactly tracked the changes in the daily total return of the Agriculture Index, USAG would have had an estimated per unit NAV of $23.39 as of June 30, 2013, for a total return over the relevant time period of (8.49)%. The difference between the actual per unit NAV total return of USAG of (8.80)% and the expected total return based on the Agriculture Index of (8.49)% was an error over the time period of (0.31)%, which is to say that USAG’s actual total return underperformed the Agriculture Index result by that percentage. USCF believes that a portion of the difference between the actual total return and the expected Agriculture Index total return can be attributed to the net impact of the expenses that USAG pays, offset in part by the income that USAG collects on its cash and cash equivalent holdings. During the six months ended June 30, 2013, USAG earned interest income of $819, which is equivalent to a weighted average income rate of approximately 0.07% for such period. During the six months ended June 30, 2013, USAG did not collect any fees from its Authorized Purchasers for creating or redeeming baskets of units. During the six months ended June 30, 2013, USAG incurred net expenses of $12,704. Income from interest net of expenses was $(11,885), which is equivalent to a weighted average net income rate of approximately (0.98)% for the six months ended June 30, 2013.
USMI
For the 30-valuation days ended June 28, 2013, the simple average daily change in the Metals Index was (0.258)%, while the simple average daily change in the per unit NAV of USMI over the same time period was (0.258)%. The average daily difference was 0.004% (or 0.4 basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Metals Index, the average error in daily tracking by the per unit NAV was (5.211)%, meaning that over this time period USMI’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal. The first chart below shows the daily movement of USMI’s per unit NAV versus the daily movement of the Metals Index for the 30-valuation day period ended June 28, 2013, the last trading day in June. The second chart below shows the monthly total returns of USMI as compared to the monthly value of the Benchmark Component Metals Futures Contracts since inception.
Since the commencement of the offering of USMI’s units to the public on June 19, 2012 to June 30, 2013, the simple average daily change in the Metals Index was (0.056)%, while the simple average daily change in the per unit NAV of USMI over the same time period was (0.0587)%. The average daily difference was 0.003% (or 0.3 basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Metals Index, the average error in daily tracking by the per unit NAV was (2.822)%, meaning that over this time period USMI’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
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*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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An alternative tracking measurement of the return performance of USMI versus the return of the Metals Index can be calculated by comparing the actual return of USMI, measured by changes in its per unit NAV, versus the expected changes in its per unit NAV under the assumption that USMI’s returns had been exactly the same as the daily changes in the price of the Metals Index.
For the six months ended June 30, 2013, the actual total return of USMI as measured by changes in its per unit NAV was (20.25)%. This is based on an initial per unit NAV of $26.47 as of December 31, 2012 and an ending per unit NAV as of June 30, 2013 of $21.11. During this time period, USMI made no distributions to its unitholders. However, if USMI’s daily changes in its per unit NAV had instead exactly tracked the changes in the daily total return of the Metals Index, USMI would have had an estimated per unit NAV of $21.21 as of June 30, 2013, for a total return over the relevant time period of (19.87)%. The difference between the actual per unit NAV total return of USMI of (20.25)% and the expected total return based on the Metals Index of (19.87)% was an error over the time period of (0.38)%, which is to say that USMI’s actual total return underperformed the Metals Index over the time period. During the six months ended June 30, 2013, USMI earned interest income of $769, which is equivalent to a weighted average income rate of approximately 0.06% for such period. In addition, during the six months ended June 30, 2013, USMI did not collect any fees from its Authorized Purchasers for creating or redeeming baskets of units. During the six months ended June 30, 2013, USMI incurred net expenses of $11,012. Income from interest net of expenses was $(10,243), which is equivalent to a weighted average net income rate of approximately (0.84)% for the six months ended June 30, 2013.
Factors That Can Impact Ability to Track the Applicable Index
There are currently three factors that have impacted or are most likely to impact a Trust Series’ ability to accurately track an Applicable Index.
First, a Trust Series may buy or sell its holdings in the then current Applicable Benchmark Component Futures Contracts at a price other than the closing settlement price of that contract on the day during which such Trust Series executes the trade. In that case, a Trust Series may pay a price that is higher, or lower, than that of the Applicable Benchmark Component Futures Contracts, which could cause the changes in the daily per unit NAV of a Trust Series to either be too high or too low relative to the daily changes in the price of the Applicable Index. During the six months ended June 30, 2013, USCF attempted to minimize the effect of these transactions by seeking to execute its purchase or sale of the Applicable Benchmark Component Futures Contracts at, or as close as possible to, the end of the day settlement price. However, it may not always be possible for a Trust Series to obtain the closing settlement price and there is no assurance that failure to obtain the closing settlement price in the future will not adversely impact a Trust Series’ attempt to track the Applicable Index over time.
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Second, each Trust Series earns interest income on its cash, cash equivalents and Treasuries. A Trust Series is not required to distribute any portion of its income to its unitholders and none of the Trust Series made any distributions to unitholders during the six months ended June 30, 2013. Interest payments, and any other income, were retained within the portfolio and added to each Trust Series’ NAV. At the same time, each Trust Series incurred expenses for its management fee, brokerage commissions and other expenses (including ongoing registration fees). The calculation of each Applicable Index includes an interest portion, calculated daily using the 90-Day U.S. Treasury Bill’s total return, but does not include an expense component. When a Trust Series’ income exceeds the sum of its expenses by the yield on the 90-Day U.S. Treasury Bill, such Trust Series realizes a net yield that tends to cause daily changes in the per unit NAV of such Trust Series to track slightly higher than daily changes in the price of the Applicable Index. If this net yield is lower than the yield on the 90-Day U.S. Treasury Bill, that tends to cause daily changes in the per unit NAV of such Trust Series to track slightly lower than daily changes in the price of the Applicable Index. During the six months ended June 30, 2013, USCI earned, on an annualized basis, approximately 0.06% on its cash and cash equivalent holdings. It also incurred cash expenses on an annualized basis of 0.95% for management fees, approximately 0.08% in brokerage commission costs related to the purchase and sale of Futures Contracts, and approximately 0.12% for other expenses. The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately (1.09)% and affected USCI’s ability to track its benchmark. During the six months ended June 30, 2013, CPER earned, on an annualized basis, approximately 0.06% on its cash and cash equivalent holdings. It also incurred cash expenses on an annualized basis of approximately 0.65%* for management fees, approximately 0.03% in brokerage commission costs related to the purchase and sale of Futures Contracts, and approximately 0.17% for other net expenses. The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately (0.79)% and affected CPER’s ability to track its benchmark. During the six months ended June 30, 2013, USAG earned, on an annualized basis, approximately 0.07% on its cash and cash equivalents holdings. It also incurred cash expenses on an annualized basis of approximately 0.80%* for management fees, approximately 0.08% in brokerage commission costs related to the purchase and sale of Futures Contracts, and approximately 0.17% for other net expenses. The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately (0.98)% and affected USAG’s ability to track its benchmark. During the six months ended June 30, 2013, USMI earned, on an annualized basis, approximately 0.06% on its cash and cash equivalent holdings. It also incurred cash expenses on an annualized basis of approximately 0.70%* for management fees, approximately 0.03% in brokerage commission costs related to the purchase and sale of Futures Contracts, and approximately 0.17% for other net expenses. The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately (0.84)% and affected USMI’s ability to track its benchmark. If short-term interest rates rise above the current levels, the level of deviation created by the yield would decrease. Conversely, if short-term interest rates were to decline, the amount of error created by the yield would increase. When short-term yields drop to a level lower than the combined expenses of the management fee and the brokerage commissions, then the tracking error becomes a negative number and would tend to cause the daily returns of the per unit NAV to underperform the daily returns of the Applicable Index. USCF anticipates that interest rates will continue to remain at historical lows and, therefore, it is anticipated that fees and expenses paid by each Trust Series will continue to be higher than interest earned by each Trust Series. As such, USCF anticipates that each Trust Series will continue to underperform tracking the Applicable Index until such a time when interest earns at least equals or exceeds the fees and expenses paid by each Trust Series.
| * | Effective as of May 29, 2012 (and continuing at least through May 1, 2014), USCF voluntarily waived the management fee paid by each of CPER and USAG from 0.95% to 0.65% and 0.80% per annum of average daily total net assets, respectively. Effective as of May 30, 2012 (and continuing at least through May 1, 2014), USCF voluntarily waived the management fee paid by USMI from 0.95% to 0.70% per annum of average daily total net assets. The reduced fee for USMI became operational as of June 19, 2012, the date USMI became listed on the NYSE Arca. |
Third, a Trust Series may hold Futures Contracts in a particular commodity other than the one specified as the Applicable Benchmark Component Futures Contract, or may hold Other Related Investments in its portfolio that may fail to closely track the Applicable Index’s total return movements. Taking USCI as an example, assume for a given month one of the Benchmark Component Futures Contracts is the NYMEX WTI physically settled Futures Contract, trading under the symbol “CL,” for the contract month of November 2012. It is possible that USCI could hold a NYMEX WTI financially settled Futures Contract, trading under the symbol “WS,” for the contract month of November 2012. Alternatively, and using the same example, USCI could hold the ICE WTI financially settled Futures Contract, also for the contract month of November 2012. As a third example, USCI could hold the NYMEX WTI physically settled Futures Contract, trading under the symbol “CL,” but for a contract month other than November 2012.
Finally, a Trust Series could hold Other Related Investments. In any of these cases, the error in tracking the Applicable Index could result in daily changes in the per unit NAV of a Trust Series that are either too high, or too low, relative to the daily changes in the price of the Applicable Index. During the six months ended June 30, 2013, none of the Trust Series held any Other Related Investments, but did, at times, hold Futures Contracts that were in months other than the months specified as the Applicable Benchmark Component Futures Contract. If any Trust Series increases in size, and due to its obligations to comply with regulatory limits or due to other market pricing or liquidity factors, such Trust Series may invest in Futures Contract months other than the designated month specified as the Applicable Benchmark Component Futures Contract, or in Other Related Investments, which may have the effect of increasing transaction related expenses and may result in increased tracking error.
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The Commodity Index
The Commodity Index was developed based upon academic research by Yale University professors Gary B. Gorton and K. Geert Rouwenhorst, and Hitotsubashi University professor Fumio Hayashi. The Commodity Index is designed to reflect the performance of a fully margined or collateralized portfolio of 14 Eligible Commodity Futures Contracts with equal weights, selected each month from a universe of the 27 Eligible Commodity Futures Contracts. The Commodity Index is rules-based and rebalanced monthly based on observable price signals. In this context, the term “rules-based” is meant to indicate that the composition of the Commodity 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 eligible to be included in the Commodity Index. Such formulas are not subject to adjustment based on other factors. The overall return on the Commodity Index is generated by two components: (i) uncollateralized returns from the Benchmark Component Futures Contracts comprising the Commodity 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 Commodity Index.
The Commodity Index is composed of physical non-financial commodity futures contracts with active and liquid markets traded upon futures exchanges in major industrialized countries. The futures contracts are denominated in U.S. dollars and weighted equally by notional amount. The Commodity Index currently reflects commodities in six commodity sectors: energy (e.g., crude oil, natural gas, diesel-heating oil, etc.), precious metals (e.g., gold, silver platinum), industrial metals (e.g., zinc, nickel, aluminum, copper, etc.), grains (e.g., wheat, corn, soybeans, etc.), softs (e.g., sugar, cotton, coffee, cocoa), and livestock (e.g., live cattle, lean hogs, feeder cattle).
Table 1 below lists the eligible commodities, the relevant Futures Exchanges on which the Eligible Commodity Futures Contracts are listed and quotation details. Table 2 lists the Eligible Commodity Futures Contracts, their sector designation and maximum allowable tenor.
TABLE 1
|
Commodity |
Designated Contract |
Exchange |
Units |
Quote | ||||
| Aluminum | High Grade Primary Aluminum | LME | 25 metric tons | USD/metric ton | ||||
| Cocoa | Cocoa | ICE-US | 10 metric tons | USD/metric ton | ||||
| Coffee | Coffee “C” | ICE-US | 37,500 lbs | U.S. cents/pound | ||||
| Copper | Copper | COMEX | 25,000 lbs | U.S. cents/pound | ||||
| Corn | Corn | CBOT | 5,000 bushels | U.S. cents/bushel | ||||
| Cotton | Cotton | ICE-US | 50,000 lbs | U.S. cents/pound | ||||
| Crude Oil (WTI) | Light, Sweet Crude Oil | NYMEX | 1,000 barrels | USD/barrel | ||||
| Crude Oil (Brent) | Crude Oil | ICE-UK | 1,000 barrels | USD/barrel | ||||
| Gas Oil | Gas Oil | ICE-UK | 100 metric tons | USD/metric ton | ||||
| Gold | Gold | COMEX | 100 troy oz. | USD/troy oz. | ||||
| Diesel-Heating Oil | Diesel-Heating Oil | NYMEX | 42,000 gallons | U.S. cents/gallon | ||||
| Lead | Lead | LME | 25 metric tons | USD/metric ton | ||||
| Lean Hogs | Lean Hogs | CME | 40,000 lbs. | U.S. cents/pound | ||||
| Live Cattle | Live Cattle | CME | 40,000 lbs. | U.S. cents/pound | ||||
| Feeder Cattle | Feeder Cattle | CME | 50,000 lbs. | U.S. cents/pound | ||||
| Natural Gas | Henry Hub Natural Gas | NYMEX | 10,000 mm btu | USD/mm btu | ||||
| Nickel | Primary Nickel | LME | 6 metric tons | USD/metric ton | ||||
| Platinum | Platinum | NYMEX | 50 troy oz. | USD/troy oz. | ||||
| Silver | Silver | COMEX | 5,000 troy oz. | U.S. cents/troy oz. | ||||
| Soybeans | Soybeans | CBOT | 5,000 bushels | U.S. cents/bushel | ||||
| Soybean Meal | Soybean Meal | CBOT | 100 tons | USD/ton | ||||
| Soybean Oil | Soybean Oil | CBOT | 60,000 lbs. | U.S. cents/pound | ||||
| Sugar | World Sugar No. 11 | ICE-US | 112,000 lbs. | U.S. cents/pound | ||||
| Tin | Tin | LME | 5 metric tons | USD/metric ton | ||||
| Unleaded Gasoline | Reformulated Blendstock for Oxygen Blending | NYMEX | 42,000 gallons | U.S. cents/gallon | ||||
| Wheat | Wheat | CBOT | 5,000 bushels | U.S. cents/bushel | ||||
| Zinc | Zinc | LME | 25 metric tons | U.S./metric ton | ||||
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TABLE 2
|
Commodity Symbol |
Commodity Name |
Sector |
Allowed Contracts |
Max. Tenor | ||||
| CO | Brent Crude | Energy | All 12 Calendar Months | 12 | ||||
| CL | Crude Oil | Energy | All 12 Calendar Months | 12 | ||||
| QS | Gas Oil | Energy | All 12 Calendar Months | 12 | ||||
| HO | Diesel-Heating Oil | Energy | All 12 Calendar Months | 12 | ||||
| NG | Natural Gas | Energy | All 12 Calendar Months | 12 | ||||
| XB | RBOB | Energy | All 12 Calendar Months | 12 | ||||
| FC | Feeder Cattle | Livestock | Jan, Mar, Apr, May, Aug, Sep, Oct, Nov | 5 | ||||
| LH | Lean Hogs | Livestock | Feb, Apr, Jun, Jul, Aug, Oct, Dec | 5 | ||||
| LC | Live Cattle | Livestock | Feb, Apr, Jun, Aug, Oct, Dec | 5 | ||||
| BO | Soybean Oil | Grains | Jan, Mar, May, Jul, Aug, Sep, Oct, Dec | 7 | ||||
| C | Corn | Grains | Mar, May, Jul, Sep, Dec | 12 | ||||
| S | Soybeans | Grains | Jan, Mar, May, Jul, Aug, Sep, Nov | 12 | ||||
| SM | Soymeal | Grains | Jan, Mar, May, Jul, Aug, Sep, Oct, Dec | 7 | ||||
| W | Wheat (Soft Red Winter) | Grains | Mar, May, Jul, Sep, Dec | 7 | ||||
| LA | Aluminum | Industrial Metals | All 12 Calendar months | 12 | ||||
| HG | Copper | Industrial Metals | All 12 Calendar Months | 12 | ||||
| LL | Lead | Industrial Metals | All 12 Calendar Months | 7 | ||||
| LN | Nickel | Industrial Metals | All 12 Calendar Months | 7 | ||||
| LT | Tin | Industrial Metals | All 12 Calendar Months | 7 | ||||
| LX | Zinc | Industrial Metals | All 12 Calendar Months | 7 | ||||
| GC | Gold | Precious Metals | Feb, Apr, Jun, Aug, Oct, Dec | 12 | ||||
| PL | Platinum | Precious Metals | Jan, Apr, Jul, Oct | 5 | ||||
| SI | Silver | Precious Metals | Mar, May, Jul, Sep, Dec | 5 | ||||
| CC | Cocoa | Softs | Mar, May, Jul, Sep, Dec | 7 | ||||
| KC | Coffee | Softs | Mar, May, Jul, Sep, Dec | 7 | ||||
| CT | Cotton | Softs | Mar, May, Jul, Dec | 7 | ||||
| SB | Sugar | Softs | Mar, May, Jul, Oct | 7 | ||||
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Prior to the end of each month, SummerHaven Indexing determines the composition of the Commodity Index and provides such information to Bloomberg, L.P. (“Bloomberg”). Values of the Commodity Index are computed by Bloomberg and disseminated approximately every fifteen (15) seconds from 8:00 a.m. to 5:00 p.m., New York City time, which also publishes a daily Commodity Index value at approximately 5:30 p.m., New York City time, under the index ticker symbol “SDCITR:IND.” Only settlement and last-sale prices are used in the Commodity Index’s calculation, bids and offers are not recognized — including limit-bid and limit-offer price quotes. Where no last-sale price exists, typically in the more deferred contract months, the previous days’ settlement price is used. This means that the underlying Commodity Index may lag its theoretical value. This tendency to lag is evident at the end of the day when the Commodity Index value is based on the settlement prices of the Benchmark Component Futures Contracts, and explains why the underlying Commodity Index often closes at or near the high or low for the day.
Composition of the Commodity Index
The composition of the Commodity Index on any given day, as determined and published by SummerHaven Indexing, is determinative of the benchmark for USCI. However, it is not possible to anticipate all possible circumstances and events that may occur with respect to the Commodity Index and the methodology for its composition, weighting and calculation. Accordingly, a number of subjective judgments must be made in connection with the operation of the Commodity Index that cannot be adequately reflected in this description of the Commodity Index. All questions of interpretation with respect to the application of the provisions of the Commodity Index methodology, including any determinations that need to be made in the event of a market emergency or other extraordinary circumstances, will be resolved by SummerHaven Indexing.
Contract Expirations
Because the Commodity Index is comprised of actively traded contracts with scheduled expirations, it can be calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Commodity Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry.
If a Futures Exchange ceases trading in all contract expirations relating to a particular Futures Contract, SummerHaven Indexing may designate a replacement contract on the commodity. The replacement contract must satisfy the eligibility criteria for inclusion in the Commodity Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Commodity Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Futures Contract and the replacement Futures Contract with respect to contractual specifications and contract expirations.
If a contract is eliminated and there is no replacement contract, the underlying commodity will necessarily be dropped from the Commodity Index. The designation of a replacement contract, or the elimination of a commodity from the Commodity Index because of the absence of a replacement contract, could affect the value of the Commodity Index, either positively or negatively, depending on the price of the contract that is eliminated and the prices of the remaining contracts. It is impossible, however, to predict the effect of these changes, if they occur, on the value of the Commodity Index.
Commodity Selection
Fourteen of the 27 Futures Contracts are selected for inclusion in the Commodity Index for the next month, subject to the constraint that each of the six commodity sectors is represented by at least one commodity. The methodology used to select the 14 Futures Contracts is based solely on quantitative data using observable futures prices and is not subject to human bias.
Monthly commodity selection is a two-step process based upon examination of the relevant futures prices for each commodity:
| 1) | The annualized percentage price difference between the closest-to-expiration Futures Contract and the next closest-to-expiration Futures Contract is calculated for each of the 27 eligible Futures Contracts on the Selection Date. The seven commodities with the highest percentage price difference are selected. |
| 2) | For the remaining 20 eligible commodities, the percentage price change of each commodity over the previous year is calculated, as measured by the change in the price of the closest-to-expiration Futures Contract on the Selection Date from the price of the closest-to-expiration Futures Contract a year prior to the Selection Date. The seven commodities with the highest percentage price change are selected. |
When evaluating the data from the second step, all six commodity sectors must be represented. If the selection of the seven additional commodities with the highest price change fails to meet the overall diversification requirement that all six commodity sectors are represented in the Commodity Index, the commodity with the highest price change among the commodities of the omitted sector(s) would be substituted for the commodity with the lowest price change among the seven additional commodities.
The 14 commodities selected are included in the Commodity Index for the next month on an equally-weighted basis. Due to the dynamic monthly commodity selection, the sector weights will vary from approximately 7% to 43% over time, depending on the price observations each month. The Selection Date for the Commodity Index is the fifth business day prior to the first business day of the next calendar month.
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The following graph shows the sector weights of the commodities selected for inclusion in the Commodity Index as of June 30, 2013.
USCI Sector Weights
as of June 30, 2013
Contract Selection
For each commodity selected for inclusion into the Commodity Index for a particular month, the Commodity Index selects a specific Benchmark Component Futures Contract with a tenor (i.e., contract month) among the eligible tenors (the range of contract months) based upon the relative prices of the Benchmark Component Futures Contracts within the eligible range of contract months. The previous notwithstanding, the contract expiration is not changed for such month if a contract remains in the Commodity Index, as long as the contract does not expire or enter its notice period in the subsequent month.
Portfolio Construction
The portfolio rebalancing takes place during the last four business days of the month (the “Rebalancing Period”). At the end of each of the days in the Rebalancing Period, one fourth of the prior month portfolio positions are replaced by an equally-weighted position in the commodity contracts determined on the Selection Date. At the end of the Rebalancing Period, the Commodity Index takes an equal-weight position of approximately 7.14% in each of the selected commodity contracts.
Commodity Index Total Return Calculation
The value of the Commodity Index on any business day is equal to the product of (i) the value of the Commodity Index on the immediately preceding business day multiplied by (ii) one plus the sum of the day’s returns for another version of the Commodity Index known as the SummerHaven Dynamic Commodity Index Excess Return (“SDCI ER”) (explained below) and one business day’s interest from hypothetical Treasuries. The value of the Commodity Index is calculated and published by Bloomberg.
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Commodity Index Base Level
The Commodity Index was set to 100 on January 2, 1991.
SDCI ER Calculation
The total return of the SDCI ER reflects the percentage change of the market values of the underlying commodity futures. During the Rebalancing Period, the Commodity Index changes its contract holdings during a four day period. The value of the SDCI ER at the end of a business day “t” is equal to the SDCI ER value on day “t-1” multiplied by the sum of the daily percentage price changes of each commodity future factoring in each respective commodity future’s notional holding on day “t-1”.
Rebalancing Period
During the Rebalancing Period, existing positions are replaced by new positions based on the signals used for contract selection as outlined above. At the end of the first day of the Rebalancing Period, the signals are observed and on the second day a new portfolio is constructed that is equally weighted in terms of notional positions in the newly selected contracts.
2013 Holiday Schedule
The Commodity Index will not be computed on the following weekdays in 2013:
| January | 1 | |||
| January | 21 | |||
| February | 18 | |||
| March | 29 | |||
| May | 27 | |||
| July | 4 | |||
| September | 2 | |||
| November | 28 | |||
| December | 25 |
The holiday schedule is subject to change. USCI will also not accept orders for Creation Baskets or Redemption Baskets on these days.
Hypothetical Performance of the Commodity Index
The table and chart below show the hypothetical performance of the Commodity Index from December 31, 1997 through June 30, 2013.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT USCI WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING.
FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
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USCF HAS HAD LITTLE OR NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
Since the Commodity Index was launched on December 18, 2009, there is only actual performance history of the Commodity Index from that date to the present. This data is available for periods prior to December 18, 2009. However, the components of the Commodity Index and the weighting of the components of the Commodity Index are established each month based on purely quantitative data that is not subject to revision based on other external factors. As a result, the table below reflects how the Commodity Index would have performed from December 31, 2002 through June 30, 2013 had it been in effect during such time period. The performance data does not reflect any reinvestment or distribution of profits, commission charges, management fees or other expenses that would have been incurred in connection with operating and managing a commodity pool designed to track the Commodity Index. Such fees and expenses would reduce the performance returns shown in the table below.
Hypothetical Performance Results* for the period
from December 31, 2002 through June 30, 2013
| Year | Ending Level* | Annual Return | ||||||
| 2002 | 380.07 | 25.25 | % | |||||
| 2003 | 479.25 | 26.09 | % | |||||
| 2004 | 592.26 | 23.58 | % | |||||
| 2005 | 781.94 | 32.03 | % | |||||
| 2006 | 1,115.82 | 42.70 | % | |||||
| 2007 | 1,518.71 | 36.11 | % | |||||
| 2008 | 1,175.77 | (22.58 | )% | |||||
| 2009 | 1,532.84 | 30.37 | % | |||||
| 2010 | 1,852.04 | 20.82 | % | |||||
| 2011 | 1,703.23 | (8.03 | )% | |||||
| 2012 | 1,726.55 | 1.37 | % | |||||
| 2013 (YTD) | 1,594.76 | (7.63 | )% | |||||
* The “base level” for the Commodity Index was set at 100 on January 2, 1991. The “Ending Level” represents the value of the components of the Commodity Index on the last trading day of each year and is used to illustrate the cumulative performance of the Commodity Index.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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SummerHaven Dynamic Commodity IndexSM Year-Over-Year
Hypothetical Total Returns (1998-6/30/2013)
Source: SummerHaven Indexing, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following table compares the hypothetical total return of the Commodity Index in comparison with the actual total return of three major indexes for the period from December 31, 1997 to June 30, 2013.
| Hypothetical and Historical Results for the period from December 31, | ||||||||||||||||
| 1997 through June 30, 2013* | ||||||||||||||||
| DJ-UBS TR | S&P GSCI TR | DB LCI OY TR | SDCI TR | |||||||||||||
| Total return | 62 | % | 51 | % | 350 | % | 609 | % | ||||||||
| Average Annual return (total) | 4.57 | % | 6.27 | % | 11.68 | % | 14.63 | % | ||||||||
| Annualized volatility | 17.23 | % | 23.71 | % | 19.51 | % | 15.95 | % | ||||||||
| Annualized Sharpe ratio | 0.12 | 0.16 | 0.46 | 0.75 | ||||||||||||
Source: SummerHaven Indexing, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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The table immediately above shows the performance of the Commodity Index from December 31, 1997 through June 30, 2013 in comparison with three traditional commodities indices: the S&P GSCI Commodity Index (GSCI®) Total Return, Dow Jones-UBS Commodity Index Total ReturnSM, and the Deutsche Bank Liquid Commodity Index-Optimum Yield Total ReturnTM. The S&P GSCI® Commodity Index Total Return is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Dow Jones-UBS Commodity Index Total ReturnSM is currently composed of futures contracts on a diversified basket of commodities traded on U.S. exchanges. The Deutsche Bank Liquid Commodity Index-Optimum Yield Total ReturnTM is designed to reflect the performance of certain wheat, corn, light sweet crude oil, diesel-heating oil, gold and aluminum futures contracts plus the returns from investing in 3-month U.S. Treasury Bills. The data for the SDCI Total Return Index is derived by using the Commodity Index’s calculation methodology with historical prices for the futures contracts comprising the Commodity Index. The information about each of the indices comes from publicly-available material about such indices but is not designed to provide a thorough overview of the methodology of each index.
None of the indices has an investment objective identical to the Commodity Index. As a result, there are inherent limitations in comparing the performance of such indices against the Commodity Index. For more information about these indices and their methodologies, please refer to the material published by the sponsors of each such index which may be found on their websites. USCI is not responsible for any information found on such websites, and such information is not part of this quarterly report on Form 10-Q.
In the table above, “Total Return” refers to the return of the relevant index from December 31, 1997 to June 30, 2013; “Annualized Volatility” is a measure of the amount of variation or fluctuation in the returns of the relevant index. Annualized Volatility is calculated by taking the monthly standard deviation of the relevant index’s return and multiplying it by the square root of 12; and “Annualized Sharpe Ratio” is a measure of the total return of each relevant index adjusted by the risk-free interest rate (the 90-Day U.S. Treasury Bill yield) and the volatility of each index. Many investors consider volatility to be a measure of risk, and lower volatility of investment returns is considered a positive investment attribute as opposed to higher volatility. Annualized Sharpe Ratio is a standard measure for investors to compare two different investments or indexes that have different levels of volatility. If two indexes have the same total return, but one has lower Annualized Volatility, then its Annualized Sharpe Ratio will be higher. The higher the Annualized Sharpe Ratio, the better the risk-adjusted performance. Annualized Sharpe Ratio is calculated by taking the average monthly total return of the relevant index and subtracting the then current yield on the 90-Day U.S. Treasury Bill. The annualized return of this series is then divided by the Annualized Volatility of this series, and this result is the Annualized Sharpe Ratio for the relevant index. A higher Sharpe Ratio is not a guarantee that one investment or index will in the future produce better risk adjustment total returns, but USCF believes it is a useful tool for investors to consider when making investment decisions.
The following chart compares the hypothetical total return of the Commodity Index in comparison with the actual total return of three major indexes between June 30, 2003 and June 30, 2013.
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10 Year Comparison of Index Returns of the DJ-UBS TR, S&P GSCI TR,
DBLCI OY TR, and the Hypothetical Returns of the SDCI TR
(6/30/03-6/30/13)
Source: SummerHaven Indexing, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following chart compares the hypothetical total return of the Commodity Index in comparison with the actual total return of three major indexes over a five year period.
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5 Year Comparison of Index Returns of the DJ-UBS TR, S&P GSCI TR,
DBLCI OY TR, and the Hypothetical Returns of the SDCI TR
(6/30/08-6/30/13)
Source: SummerHaven Indexing, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The Copper Index
The Copper Index is a single-commodity index designed to be an investment benchmark for copper as an asset class. The Copper Index is composed of copper futures contracts on the COMEX exchange. The Copper Index attempts to maximize backwardation and minimize contango while utilizing contracts in liquid portions of the futures curve.
The Copper Index is rules-based and is rebalanced monthly based on observable price signals described below in the section “Contract Selection and Weighting.” In this context, the term “rules-based” is meant to indicate that the composition of the Copper Index in any given month will be determined by quantitative formulas relating to the prices of the futures contracts that are included in the Copper Index. Such formulas are not subject to adjustment based on other factors.
The overall return on the Copper Index is generated by two components: (i) uncollateralized returns from the Benchmark Component Copper Futures Contracts comprising the Copper Index, and (ii) a daily fixed income return reflecting the interest earned on hypothetical 3-month Treasuries, calculated using the weekly auction rate for 3-Month Treasuries published by the U.S. Department of the Treasury. SummerHaven Indexing is the owner of the Copper Index.
Table 1 below lists the Futures Exchange on which the Eligible Copper Futures Contracts are listed and quotation details. Table 2 lists the Eligible Copper Futures Contracts, their sector designation and maximum allowable tenor.
TABLE 1
|
Commodity |
Designated Contract | Exchange | Units | Quote | ||||
| Copper | Copper | COMEX | 25,000 lbs | U.S. cents/pound |
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TABLE 2
| Commodity Name | Commodity Symbol |
Allowed Contracts | Max. Tenor |
|||||
| Copper | HG | All 12 calendar months | 19 | |||||
Prior to the end of each month, SummerHaven Indexing determines the composition of the Copper Index and provides such information to the NYSE Arca. Values of the Copper Index are computed by the NYSE Arca and disseminated approximately every fifteen (15) seconds from 8:00 a.m. to 5:00 p.m., New York City time, which also publishes a daily Copper Index value at approximately 5:30 p.m., New York City time, under the index ticker symbol “SCITR”. Only settlement and last-sale prices are used in the Copper Index’s calculation, bids and offers are not recognized – including limit-bid and limit-offer price quotes. Where no last-sale price exists, typically in the more deferred contract months, the previous days’ settlement price is used. This means that the underlying Copper Index may lag its theoretical value. This tendency to lag is evident at the end of the day when the Copper Index value is based on the settlement prices of the Benchmark Component Copper Futures Contracts, and explains why the underlying Copper Index often closes at or near the high or low for the day.
Composition of the Copper Index
The composition of the Copper Index on any given day, as determined and published by SummerHaven Indexing, is determinative of the benchmark for CPER. Neither the index methodology for the Copper Index nor any set of procedures, however, are capable of anticipating all possible circumstances and events that may occur with respect to the Copper Index and the methodology for its composition, weighting and calculation. Accordingly, a number of subjective judgments must be made in connection with the operation of the Copper Index that cannot be adequately reflected in this description of the Copper Index. All questions of interpretation with respect to the application of the provisions of the index methodology for the Copper Index, including any determinations that need to be made in the event of a market emergency or other extraordinary circumstances, will be resolved by SummerHaven Indexing.
Contract Expirations
Because the Copper Index is comprised of actively traded contracts with scheduled expirations, it can be calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Copper Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry.
If a futures exchange, such as the COMEX, ceases trading in all contract expirations relating to an Eligible Copper Futures Contract, SummerHaven Indexing may designate a replacement contract. The replacement contract must satisfy the eligibility criteria for inclusion in the Copper Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Copper Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Benchmark Component Copper Futures Contract and the replacement contract with respect to contractual specifications and contract expirations.
The designation of a replacement contract could affect the value of the Copper Index, either positively or negatively, depending on the price of the contract that is eliminated and the prices of the replacement contract. It is impossible, however, to predict the effect of these changes, if they occur, on the value of the Copper Index.
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Contract Selection and Weighting
Weights for each of the Benchmark Component Copper Futures Contracts are determined for the next month. The methodology used to calculate the Copper Index weighting is based solely on quantitative data using observable futures prices and is not subject to human bias.
The monthly weighting selection is a process based upon examination of the relevant futures prices for copper:
1) On the Selection Date:
| a) | the copper futures curve is assessed to be in either backwardation or contango (as discussed below); and |
| b) | the annualized percentage price difference between the Closest-to-Expiration Eligible Copper Futures Contract and each of the Next Four Eligible Copper Futures Contracts is calculated. For each month, the Closest-to-Expiration Eligible Copper Futures Contract and the Next Four Eligible Copper Futures Contracts are as follows: |
| Month | January | February | March | April | May | June | July | August | September | October | November | December | ||||||||||||
| Closest-to- | ||||||||||||||||||||||||
| Expiration | ||||||||||||||||||||||||
| Eligible | ||||||||||||||||||||||||
| Futures | ||||||||||||||||||||||||
| Contract | February | March | April | May | June | July | August | September | October | November | December | January | ||||||||||||
| Next Four | April | May | June | July | August | September | October | November | December | January | February | March | ||||||||||||
| Eligible | May | June | July | August | September | October | November | December | January | February | March | April | ||||||||||||
| Futures | June | July | August | September | October | November | December | January | February | March | April | May | ||||||||||||
| Contracts | July | August | September | October | November | December | January | February | March | April | May | June |
A futures curve in backwardation occurs when the price of the closest-to-expiration contract is greater than or equal to the price of the third closest-to-expiration contract. These contracts will have expirations that are approximately two months apart. A curve not in backwardation is defined as being in contango, which occurs when the price of the closest-to-expiration contract is less than the price of the third closest-to-expiration contract.
2a) Backwardation: If the copper futures curve is in backwardation on the Selection Date, the Copper Index takes positions in the two Eligible Copper Futures Contracts with the highest annualized percentage price difference, each weighted at 50%.
A hypothetical example is included below, with the two selected Eligible Copper Futures Contracts shaded below (the selected commodities are ranked 1 and 2):
| Copper Futures Contract | Expiration Date | Contract Price | ||||
| Nearest-to-maturity | November-10 | 374.70 | ||||
| Third nearest-to-maturity | January-11 | 365.20 | ||||
| Eligible Copper Futures Contracts | Price | Annualized Percentage Price Difference |
Ranking | |||||||||
| January-11 | 365.20 | 10.47 | % | 1 | ||||||||
| February-11 | 363.00 | 10.15 | % | 4 | ||||||||
| March-11 | 359.70 | 10.36 | % | 3 | ||||||||
| April-11 | 356.70 | 10.41 | % | 2 | ||||||||
2b) Contango: If the copper futures curve is in contango, then the Copper Index takes positions in three Eligible Copper Futures Contracts, as follows: first, the Copper Index takes positions in the two Eligible Copper Futures Contracts with the highest annualized percentage price difference, each weighted at 25%; then, the Copper Index also takes a position in the closest-to-expiration December Eligible Future Contract that has expiration more distant than the fourth of the Next Four Eligible Copper Futures Contracts for the applicable month, which position is weighted at 50%.
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A hypothetical example is included below, with the next two selected Eligible Copper Futures Contracts shaded below (the selected commodities are ranked 1 – 2):
| Copper Futures Contract | Expiration Date |
Contract Price | ||||
| Nearest-to-maturity | November-10 | 374.00 | ||||
| Third nearest-to-maturity | January-11 | 375.70 | ||||
| Eligible Copper Futures Contracts | Price | Annualized Percentage Price Difference |
Ranking | |||||||||
| January-11 | 375.70 | (1.97 | )% | 4 | ||||||||
| February-11 | 376.00 | (1.78 | )% | 3 | ||||||||
| March-11 | 376.30 | (1.59 | )% | 2 | ||||||||
| April-11 | 376.40 | (1.37 | )% | 1 | ||||||||
Due to the dynamic monthly weighting calculation, the individual weights will vary-over time, depending on the price observations each month. The Selection Date for the Copper Index is the last business day of the calendar month.
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The following graph shows the weights of the Benchmark Component Copper Futures Contracts selected for inclusion in the Copper Index as of June 30, 2013.
Portfolio Construction
The portfolio rebalancing takes place during the Rebalancing Period. At the end of each of the days in the Rebalancing Period one fourth of the prior month portfolio positions are replaced by the new weights for the Benchmark Component Copper Futures Contracts determined on the Selection Date.
Copper Index Total Return Calculation
The value of the Copper Index on any business day is equal to the product of (i) the value of the Copper Index on the immediately preceding business day multiplied by (ii) one plus the sum of the day’s returns for another version of the Copper Index known as the SummerHaven Dynamic Copper Index Excess Return (“SCI ER”) (explained below) and one business day’s interest from the hypothetical Treasury Bill portfolio. The value of the Copper Index will be calculated and published by the NYSE Arca.
Copper Index Base Level
The Copper Index was set to 100 on January 2, 1991.
SCI ER Calculation
The total return of the SCI ER reflects the percentage change of the market values of the underlying commodity futures. During the Rebalancing Period, the Copper Index changes its contract holdings and weightings during a four day period. The value of the SCI ER at the end of a business day “t” is equal to the SCI ER value on day “t -1” multiplied by the sum of the daily percentage price changes of each commodity future factoring in each respective commodity future’s notional holding on day “t -1”.
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Rebalancing Period
The Copper Index is rebalanced during the first 4 business days of each calendar month, when existing positions are placed by new positions and weightings based on the signals used for contract selection on the last business day of the prior calendar month as outlined above.
2013 Holiday Schedule
The Copper Index will not be computed on the following weekdays in 2013:
| January | 1 | |||
| January | 21 | |||
| February | 18 | |||
| March | 29 | |||
| May | 27 | |||
| July | 4 | |||
| September | 2 | |||
| November | 28 | |||
| December | 25 |
The holiday schedule is subject to change. CPER will also not accept Creation Baskets or Redemption Baskets on these days.
Hypothetical Performance of the Copper Index
The table and chart below show the hypothetical performance of the Copper Index from December 31, 1997 through June 30, 2013.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
USCF HAS HAD LITTLE OR NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
Since the Copper Index was launched on November 4, 2010, there is no actual performance history of the Copper Index to present. However, the components of the Copper Index and the weighting of the components of the Copper Index are established each month based on purely quantitative data that is not subject to revisions based on other external factors. This data is available for periods prior to November 4, 2010. As a result, the table below reflects how the Copper Index would have performed from December 31, 2002 through June 30, 2013 had it been in effect during such time period. The performance data does not reflect any reinvestment or distribution profits, commission charges, management fees or other expenses that would have been incurred in connection with operating and managing a commodity pool designed to track the Copper Index. Such fees and expenses would reduce the performance returns shown in the table below.
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Hypothetical Performance Results for the Copper Index for the period
from December 31, 2002 through June 30, 2013
| Year | Ending Level* | Annual Return | ||||||
| 2002 | 145.444 | 4.10 | % | |||||
| 2003 | 209.444 | 44.00 | % | |||||
| 2004 | 310.819 | 48.40 | % | |||||
| 2005 | 550.909 | 77.24 | % | |||||
| 2006 | 911.128 | 65.39 | % | |||||
| 2007 | 1,059.165 | 16.25 | % | |||||
| 2008 | 497.182 | (53.06 | )% | |||||
| 2009 | 1,153.122 | 131.93 | % | |||||
| 2010 | 1,491.949 | 29.38 | % | |||||
| 2011 | 1,164.510 | (21.95 | )% | |||||
| 2012 | 1,223.150 | 5.04 | % | |||||
| 2013 (YTD) | 1,016.090 | (16.93 | )% | |||||
* The “base level” for the Copper Index was set at 100 on January 2, 1991. The “Ending Level” represents the value of the components of the Copper Index on the last trading day of each year and is used to illustrate the cumulative performance of the Copper Index.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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SummerHaven Copper Index Year-Over-Year
Hypothetical Total Returns (1998-6/30/13)
source: Summerhaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following table compares the hypothetical total return of the Copper Index in comparison with the actual total return of a major index from December 31, 1997 through June 30, 2013.
| Hypothetical and Historical Results for the period from December 31, 1997 through June 30, 2013 |
||||||||
| DJ-UBS Copper TR | SCI TR | |||||||
| Total return | 340 | % | 549 | % | ||||
| Average annual return (total) | 16.00 | % | 19.25 | % | ||||
| Annualized volatility | 28.44 | % | 27.77 | % | ||||
| Annualized Sharpe ratio | 0.47 | 0.60 | ||||||
Source: SummerHaven Indexing, Bloomberg, LME
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The table above shows the performance of the Copper Index from December 31, 1997 through June 30, 2013 in comparison with a traditional commodity index and spot copper prices: the Dow Jones-UBS Copper Subindex Total ReturnSM and spot copper prices less warehouse storage rents. The Dow Jones-UBS Copper Subindex Total ReturnSM includes the contract in the Dow Jones-UBS Commodity Index Total Return that relates to a single commodity, copper (currently the Copper High Grade futures contract traded on the COMEX). The data for the SCI Total Return Index is derived by using the Copper Index’s calculation methodology with historical prices for the futures contracts comprising the Copper Index. The information about the index above comes from publicly-available material about such index but is not designed to provide a thorough overview of the methodology of such index. The index noted above does not have investment objectives identical to the Copper Index. As a result, there are inherent limitations in comparing such performance against the Copper Index. For more information about the index and its methodologies, please refer to the material published by the sponsor of the Dow Jones-UBS Copper Subindex Total Return which may be found on its website. USCF is not responsible for any information found on such website, and such information is not part of this quarterly report on Form 10-Q.
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In the table above, “Total Return” refers to the return of the relevant index from December 31, 1997 to June 30, 2013; “Annualized Volatility” is a measure of the amount of variation or fluctuation in the returns of the relevant index. Annualized Volatility is calculated by taking the monthly standard deviation of the relevant index’s return and multiplying it by the square root of 12; and “Annualized Sharpe Ratio” is a measure of the total return of each relevant index adjusted by the risk-free interest rate (the 90-Day U.S. Treasury Bill yield) and the volatility of each index. Many investors consider volatility to be a measure of risk, and lower volatility of investment returns is considered a positive investment attribute as opposed to higher volatility. Annualized Sharpe Ratio is a standard measure for investors to compare two different investments or indexes that have different levels of volatility. If two indexes have the same total return, but one has lower Annualized Volatility, then its Annualized Sharpe Ratio will be higher. The higher the Annualized Sharpe Ratio, the better the risk-adjusted performance. Annualized Sharpe Ratio is calculated by taking the average monthly total return of the relevant index and subtracting the then current yield on the 90-Day U.S. Treasury Bill. The annualized return of this series is then divided by the Annualized Volatility of this series, and this result is the Annualized Sharpe Ratio for the relevant index. A higher Sharpe Ratio is not a guarantee that one investment or index will in the future produce better risk adjustment total returns, but USCF believes it is a useful tool for investors to consider when making investment decisions.
The following chart compares the hypothetical total return of the Copper Index in comparison with the actual total return of a major index and spot copper prices (less storage cost) between June 30, 2003 and June 30, 2013.
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10 Year Comparison of Index Returns of the S&P GSCI Copper TR,
DJ-UBS Copper TR, Spot Copper price, Spot Copper Price less Storage
Cost, and the Hypothetical Returns of the SCI TR (6/30/03-6/30/13)
Source: SummerHaven Indexing, Bloomberg, LME
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following chart compares the hypothetical total return of the Copper Index in comparison with the actual total return of two major indices and spot copper prices (less storage cost) over a 5 year period.
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Five Year Comparison Of Index Returns of the S&P GSCI Copper TR,
DJ-UBS Copper TR, Spot Copper price, Spot Copper Price
less Storage Cost, and the Hypothetical Returns of the SCI TR (6/30/08-6/30/13)
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Source: SummerHaven Indexing, Bloomberg, LME
The Agriculture Index
The Agriculture Index is an agricultural sector index designed to broadly represent major agricultural commodities 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 Agriculture Index consists of fourteen agricultural markets: soybeans, corn, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs. Each agricultural commodity is assigned a base weight based on an assessment of market liquidity and the commodity’s overall economic importance. Each commodity is U.S. dollar based, with the exception of canola, which is quoted in Canadian dollars and converted to U.S. dollars for the purpose of the Agriculture Index calculation.
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, agricultural commodities determined to be in low inventory state will be weighted more heavily, and agricultural commodities in high inventory state will be weighted less heavily during any given month.
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The Agriculture Index is rules-based and 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 Agriculture 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 Agriculture Index. Such formulas are not subject to adjustment based on other factors.
The overall return on the Agriculture Index is generated by two components: (i) uncollateralized returns from the Benchmark Component Agriculture Futures Contracts comprising the Agriculture 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 Agriculture Index.
Table 1 below lists the eligible agricultural commodities, the relevant Futures Exchange on which each Benchmark Component Agriculture Futures Contract is listed and quotation details. Table 2 lists the Benchmark Component Agriculture Futures Contracts, their sector designation and maximum allowable tenor.
TABLE 1
|
Commodity |
Designated Contract |
Exchange |
Units |
Quote | ||||
| Soybeans | Soybeans | CBOT | 5,000 bushels | U.S. cents/bushel | ||||
| Corn | Corn | CBOT | 5,000 bushels | U.S. cents/bushel | ||||
| Soft Red Winter Wheat | Soft Red Winter Wheat | CBOT | 5,000 bushels | U.S. cents/bushel | ||||
| Hard Red Winter Wheat | Hard Red Winter Wheat | KCBT | 5,000 bushels | U.S. cents/bushel | ||||
| Bean Oil | Bean Oil | CBOT | 60,000 lbs. | U.S. cents/pound | ||||
| Soybean Meal | Soybean Meal | CBOT | 100 tons | USD/ton | ||||
| Coffee | Coffee “C” | ICE-US | 37,500 lbs. | U.S. cents/pound | ||||
| Cocoa | Cocoa | ICE-US | 10 metric tons | USD/metric ton | ||||
| Sugar | World Sugar No. 11 | ICE-US | 112,000 lbs. | U.S. cents/pound | ||||
| Canola | Canola | ICE- CANADA | 20 tonnes | $CAD/tonne | ||||
| Cotton | Cotton | ICE-US | 50,000 lbs. | U.S. cents/pound | ||||
| Feeder Cattle | Feeder Cattle | CME | 50,000 lbs. | U.S. cents/pound | ||||
| Live Cattle | Live Cattle | CME | 40,000 lbs. | U.S. cents/pound | ||||
| Lean Hogs | Lean Hogs | CME | 40,000 lbs. | U.S. cents/pound | ||||
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TABLE 2
|
Commodity Name |
Commodity Symbol |
Allowed Contracts |
Max. Tenor | |||
| Soybeans | S | Jan, Mar, May, July, Aug, Sep, Nov, | 12 | |||
| Corn | C | Mar, May, July, Sep, Dec | 12 | |||
| Soft Red Winter Wheat | W | Mar, May, July, Sep, Dec | 7 | |||
| Hard Red Winter Wheat | KW | Mar, May, July, Sep, Dec | 5 | |||
| Bean Oil | BO | Jan, Mar, May, July, Aug, Sep, Oct, Dec | 7 | |||
| Soybean Meal | SM | Jan, Mar, May, July, Aug, Sep, Oct, Dec | 7 | |||
| Coffee | KC | Mar, May, July, Sep, Dec | 7 | |||
| Cocoa | CC | Mar, May, July, Sep, Dec | 7 | |||
| Sugar | SB | Mar, May, July, Oct, | 7 | |||
| Canola | RS | Jan, Mar, May, July, Nov | 5 | |||
| Cotton | CT | Mar, May, July, Dec | 7 | |||
| Feeder Cattle | FC | Jan, Mar, April, May, Aug, Sep, Oct, Nov | 5 | |||
| Live Cattle | LC | Feb, April, June, Aug, Oct, Dec | 5 | |||
| Lean Hogs | LH | Feb, April, June, July, Aug, Oct, Dec | 5 | |||
Prior to the end of each month, SummerHaven Indexing determines the composition of the Agriculture Index and provides such information to the NYSE Arca. Values of the Agriculture Index are computed by the NYSE Arca and disseminated approximately every fifteen (15) seconds from 8:00 a.m. to 5:00 p.m., New York City time, which also publishes a daily Agriculture Index value at approximately 5:30 p.m., New York City time, under the index ticker symbol “SDAITR”. Only settlement and last-sale prices are used in the Agriculture Index’s calculation, bids and offers are not recognized; including limit-bid and limit-offer price quotes. Where no last-sale price exists, typically in the more deferred contract months, the previous days’ settlement price is used. This means that the underlying Agriculture Index may lag its theoretical value. This tendency to lag is evident at the end of the day when the Agriculture Index value is based on the settlement prices of the Benchmark Component Agriculture Futures Contracts, and explains why the underlying Agriculture Index often closes at or near the high or low for the day.
Currency Conversion
Canola seed futures trade on the ICE Futures Canada and are denominated in Canadian dollars. Canola futures prices are divided by the USD/CAD foreign exchange spot price for purposes of index calculation and commodity weighting calculations. The USD/CAD price used for canola futures for the daily Agriculture Index value is the 3:00 p.m. EST USD/CAD price quoted by Bloomberg under currency ticker “USDCAD F150”.
Composition of the Agriculture Index
The composition of the Agriculture Index on any given day, as determined and published by SummerHaven Indexing, is determinative of the benchmark for USAG. Neither the Agriculture Index methodology nor any set of procedures, however, are capable of anticipating all possible circumstances and events that may occur with respect to the Agriculture Index and the methodology for its composition, weighting and calculation. Accordingly, a number of subjective judgments must be made in connection with the operation of the Agriculture Index that cannot be adequately reflected in this description of the Agriculture Index. All questions of interpretation with respect to the application of the provisions of the Agriculture Index methodology, including any determinations that need to be made in the event of a market emergency or other extraordinary circumstances, will be resolved by SummerHaven Indexing.
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Contract Expirations
Because the Agriculture Index is comprised of actively traded contracts with scheduled expirations, it can be calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Agriculture Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry.
If a Futures Exchange ceases trading in all contract expirations relating to a particular Benchmark Component Agriculture Futures Contract, SummerHaven Indexing may designate a replacement contract on the particular agricultural commodity. The replacement contract must satisfy the eligibility criteria for inclusion in the Agriculture Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Agriculture Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Benchmark Component Agriculture Futures Contract and the replacement contract with respect to contractual specifications and contract expirations.
If a Benchmark Component Agriculture Futures Contract is eliminated and there is no replacement contract, the underlying agricultural commodity will necessarily drop out of the Agriculture Index. The designation of a replacement contract, or the elimination of an agricultural commodity from the Agriculture Index because of the absence of a replacement contract, could affect the value of the Agriculture Index, either positively or negatively, depending on the price of the contract that is eliminated and the prices of the remaining contracts. It is impossible, however, to predict the effect of these changes, if they occur, on the value of the Agriculture Index.
Commodity Weighting
Each of the Benchmark Component Agriculture Futures Contracts will remain in the Agriculture Index from month to month. Weights for each of the Benchmark Component Agriculture Futures Contracts in the Agriculture Index are determined for the next month. The methodology used to calculate the Agriculture Index weighting is based solely on quantitative data using observable futures prices and is not subject to human bias.
The monthly weighting selection is a three-step process based upon examination of the relevant futures prices for each agricultural commodity:
| 1) | The annualized percentage price difference between the closest-to-expiration Benchmark Component Agriculture Futures Contract and the next closest-to-expiration Benchmark Component Agriculture Futures Contract is calculated for each of the 14 eligible agricultural commodities on the fifth business day prior ro the first business day of the next calendar month (the “Selection Date”). The four agricultural commodities with the highest percentage price difference are selected. |
| 2) | For the remaining 10 eligible agricultural commodities, the percentage price change of each agricultural commodity over the previous year is calculated, as measured by the change in the price of the closest-to- expiration Benchmark Component Agriculture Futures Contract on the Selection Date from the price of the closest-to-expiration Benchmark Component Agriculture Futures Contract a year prior to the Selection Date. The three agricultural commodities with the highest percentage price change are selected. |
| 3) | For the seven commodities selected through basis (step 1) and momentum (step 2), each commodity weight is increased by 2% above its base weighting for the following month. For the remaining seven commodities not selected, each commodity weight is decreased by 2% below its base weighting for the following month. |
Due to the dynamic monthly agricultural commodity weighting calculation, the individual agricultural commodity weights will vary over time, depending on the price observations each month. The Selection Date for the Agriculture Index is the fifth business day prior to the first business day of the next calendar month.
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The following graph shows the agricultural commodity weights of the agricultural commodities selected for inclusion in the Agriculture Index as of June 30, 2013.
Agriculture Index Commodity Weights
as of June 30, 2013
Contract Selection
For each agricultural commodity in the Agriculture Index, the index selects a specific Benchmark Component Agriculture Futures Contract with a tenor (i.e., contract month) among the eligible tenors (the range of contract months) based upon the relative prices of the Benchmark Component Agriculture Futures Contracts within the eligible range of contract months. The previous notwithstanding, the contract expiration is not changed for that month if a Benchmark Component Agriculture Futures Contract remains in the Agriculture Index, as long as the contract does not enter expire or enter its notice period in the subsequent month.
Portfolio Construction
The portfolio rebalancing takes place during the Rebalancing Period. At the end of each of the days in the last four business days of each month (the “Rebalancing Period”) one fourth of the prior month portfolio positions are replaced by the new commodity weights for the commodity contracts determined on the Selection Date.
Currency Conversion
Canola futures are denominated and quoted in Canadian dollars.
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Agriculture Index Total Return Calculation
The value of the Agriculture Index on any business day is equal to the product of (i) the value of the Agriculture Index on the immediately preceding business day multiplied by (ii) one plus the sum of the day’s returns for another version of the Agriculture Index known as the SummerHaven Dynamic Agriculture Index Excess Return (“SDAI ER”) (explained below) and one business day’s interest from the hypothetical Treasury Bill portfolio. The value of the Agriculture will be calculated and published by the NYSE Arca.
Agriculture Index Base Level
The Agriculture Index was set to 100 on January 2, 1991.
SDAI ER Calculation
The total return of the SDAI ER reflects the percentage change of the market values of the underlying Benchmark Component Agriculture Futures Contracts. During the Rebalancing Period, the Agriculture Index changes its contract holdings and weightings during a four day period. The value of the SDAI ER at the end of a business day “t” is equal to the SDAI ER value on day “t -1” multiplied by the sum of the daily percentage price changes of each commodity future factoring in each respective commodity future’s notional holding on day “t -1”.
Rebalancing Period
During the Rebalancing Period, existing positions are replaced by new positions based on the signals used for contract selection as outlined above. At the end of the first day of the Rebalancing Period, the signals are observed and on the second day a new portfolio is constructed that is equally weighted in terms of notional positions in the newly selected contracts.
2013 Holiday Schedule
The Agriculture Index will not be computed on the following weekdays in 2013:
| January | 1 | |||
| January | 21 | |||
| February | 18 | |||
| March | 29 | |||
| May | 27 | |||
| July | 4 | |||
| September | 2 | |||
| November | 28 | |||
| December | 25 |
The holiday schedule is subject to change. USAG will not accept Creation Baskets or Redemption Baskets on these days.
The table and chart below show the hypothetical performance of the Agriculture Index from December 31, 2002 through June 30, 2013.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
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ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
USCF HAS HAD LITTLE OR NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
Since the Agriculture Index was launched on September 23, 2010, there is no actual performance history of the Agriculture Index to present. However, the components of the Agriculture Index and the weighting of the components of the Agriculture Index are established each month based on purely quantitative data that is not subject to revisions based on other external factors. This data is available for periods prior to September 23, 2010. As a result, the table below reflects how the Agriculture Index would have performed from December 31, 2002 through June 30, 2013 had it been in effect during such time period. The performance data does not reflect any reinvestment or distribution of profits, commission charges, management fees or other expenses that would have been incurred in connection with operating and managing a commodity pool designed to track the Agriculture Index. Such fees and expenses would reduce the performance returns shown in the table below.
Hypothetical Performance Results for the period
from December 31, 2002 through June 30, 2013
| Year | Ending Level* | Annual Return | ||||||
| 2002 | 179.705 | 19.48 | % | |||||
| 2003 | 201.497 | 12.13 | % | |||||
| 2004 | 213.353 | 5.88 | % | |||||
| 2005 | 231.652 | 8.58 | % | |||||
| 2006 | 259.773 | 12.14 | % | |||||
| 2007 | 315.849 | 21.59 | % | |||||
| 2008 | 261.024 | (17.36 | )% | |||||
| 2009 | 282.237 | 8.13 | % | |||||
| 2010 | 377.898 | 33.89 | % | |||||
| 2011 | 348.780 | (7.71 | )% | |||||
| 2012 | 360.610 | 3.39 | % | |||||
| 2013 (YTD) | 329.970 | (8.50 | )% | |||||
| * | The “base level” for the Agriculture Index was set at 100 on January 2, 1991. The “Ending Level” represents the value of the components of the Index on the last trading day of each year and is used to illustrate the cumulative performance of the Index. |
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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SummerHaven Dynamic Agriculture Index Year-Over-Year
Hypothetical Total Returns (1998-6/30/13)
source: Summerhaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following table compares the hypothetical total return of the Agriculture Index in comparison with the actual total return of three major indexes from December 31, 1997 through June 30, 2013.
| Hypothetical and Historical Results for the period from December 31, | ||||||||||||||||
| 1997 through June 30, 2013 | ||||||||||||||||
| DJ-UBS Ag TR | S&P GSCI Ag TR | DB LCI OY Ag TR | SDAI TR | |||||||||||||
| Total return | (7) | % | (42) | % | 26 | % | 67 | % | ||||||||
| Average annual return (total) | 0.18 | % | (2.70) | % | 1.61 | % | 3.22 | % | ||||||||
| Annualized volatility | 20.93 | % | 21.65 | % | 19.92 | % | 15.84 | % | ||||||||
| Annualized Sharpe ratio | (0.10) | (0.23) | (0.04) | 0.05 | ||||||||||||
The table above shows the performance of the Agriculture Index from December 31, 1997 through June 30, 2013 in comparison with three traditional agricultural commodities indices: the S&P GSCI® Agriculture Index Total Return, Dow Jones-UBS Agriculture Total Return Sub-indexSM, and the Deutsche Bank Liquid Commodity Index-Optimum Yield Agriculture Total ReturnTM. The S&P GSCI® Agriculture Index Total Return comprises the commodities: Wheat (Chicago and Kansas), Corn, Soybeans, Cotton, Sugar, Coffee, and Cocoa, and is part of a series of sub-indices representing components of the S&P GSCI. The Dow Jones-UBS Agriculture Total Return Sub-IndexSM is currently composed of seven futures contracts on agricultural commodities traded on U.S. exchanges. The Deutsche Bank Liquid Commodity Index-Optimum Yield Agriculture Total ReturnTM is designed to reflect the performance of certain corn, wheat, soybean and sugar futures contracts plus the returns from investing in 3 month U.S. Treasury Bills. The data for the SDAI Total Return Index is derived by using the Agriculture Index’s calculation methodology with historical prices for the futures contracts comprising the Agriculture Index. The information about each of the indices comes from publicly-available material about such indices but is not designed to provide a thorough overview of the methodology of each index. None of the indices have investment objectives identical to the Agriculture Index. As a result, there are inherent limitations in comparing the performance of such indices against the Agriculture Index. For more information about these indices and their methodologies, please refer to the material published by the sponsors of each such index which may be found on their websites. USAG is not responsible for any information found on such websites, and such information is not part of this prospectus.
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In the table above, “Total Return” refers to the return of the relevant index from December 31, 1997 through June 30, 2013; “Annualized Volatility” is a measure of the amount of variation or fluctuation in the returns of the relevant index. Annualized Volatility is calculated by taking the monthly standard deviation of the relevant index’s return and multiplying it by the square root of 12; and “Annualized Sharpe Ratio” is a measure of the total return of each relevant index adjusted by the risk-free interest rate (the 90 Day U.S. Treasury Bill yield) and the volatility of each index. Many investors consider volatility to be a measure of risk, and lower volatility of investment returns is considered a positive investment attribute as opposed to higher volatility. Annualized Sharpe Ratio is a standard measure for investors to compare two different investments or indexes that have different levels of volatility. If two indexes have the same total return, but one has lower Annualized Volatility, then its Annualized Sharpe Ratio will be higher. The higher the Annualized Sharpe Ratio, the better the risk-adjusted performance. Annualized Sharpe Ratio is calculated by taking the average monthly total return of the relevant index and subtracting the then current yield on the 90 Day U.S. Treasury Bill. The annualized return of this series is then divided by the Annualized Volatility of this series, and this result is the Annualized Sharpe Ratio for the relevant index. A higher Sharpe Ratio is not a guarantee that one investment or index will in the future produce better risk adjustment total returns, but management believes it is a useful tool for investors to consider when making investment decisions.
The following chart compares the hypothetical total return of the Agriculture Index in comparison with the actual total return of three major indexes between June 30, 2003 and June 30, 2013.
10 Year Comparison of Index Returns of the DJ-UBS Ag TR, S&P GSCI Ag TR,
DB LCI OY Ag TR, and the Hypothetical Returns of the SDAI TR
(6/30/03-6/30/13)
Source: SummerHaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following chart compares the hypothetical total return of the Agriculture Index in comparison with the actual total return of three major indexes over a 5 year period.
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Five Year Comparison of Index Returns of the DJ-UBS Ag TR, S&P GSCI Ag TR,
DB LCI OY Ag TR, and the Hypothetical Returns of the SDAI TR
(6/30/08-6/30/2013)
Source: SummerHaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The Metals Index
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.
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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.
Table 1 below lists the eligible metals, the relevant Futures Exchange on which each Benchmark Component Metals Futures Contract is listed and quotation details. Table 2 lists the Benchmark Component Metals Futures Contracts, their sector designation and maximum allowable tenor.
TABLE 1
|
Commodity |
Designated Contract | Exchange | Units | Quote | ||||
| Aluminum | High Grade Primary Aluminum | LME | 25 metric tons | USD/metric ton | ||||
| Copper | Copper | COMEX | 25,000 lbs | U.S. cents/pound | ||||
| Lead | Lead | LME | 25 metric tons | USD/metric ton | ||||
| Nickel | Primary Nickel | LME | 6 metric tons | USD/metric ton | ||||
| Tin | Tin | LME | 5 metric tons | USD/metric ton | ||||
| Zinc | Special High Grade Zinc | LME | 25 metric tons | USD/metric ton | ||||
| Gold | Gold | COMEX | 100 troy oz. | USD/troy oz. | ||||
| Silver | Silver | COMEX | 5,000 troy oz. | U.S. cents/troy oz. | ||||
| Platinum | Platinum | NYMEX | 50 troy oz. | USD/troy oz. | ||||
| Palladium | Palladium | NYMEX | 100 troy oz. | USD/troy oz. |
TABLE 2
|
Commodity Name |
Commodity Symbol |
Allowed Contracts | Max. Tenor | |||
| Aluminum | LA | All 12 calendar months | 12 | |||
| Copper | HG | All 12 calendar months | 12 | |||
| Lead | LL | All 12 calendar months | 7 | |||
| Nickel | LN | All 12 calendar months | 7 | |||
| Tin | LT | All 12 calendar months | 7 | |||
| Zinc | LX | All 12 calendar months | 7 | |||
| Gold | GC | Feb, April, June, Aug, Oct, Dec | 12 | |||
| Silver | SI | March, May, July, Sep, Dec | 5 | |||
| Platinum | PL | Jan, April, July, Oct | 5 | |||
| Palladium | PA | March, June, Sept, Dec |
Prior to the end of each month, SummerHaven Indexing determines the composition of the Metals Index and provides such information to the NYSE Arca. Values of the Metals Index are computed by the NYSE Arca and disseminated approximately every fifteen (15) seconds from 8:00 a.m. to 5:00 p.m., New York City time, which also publishes a daily Metals Index value at approximately 5:30 p.m., New York City time, under the index ticker symbol “SDMITR”. Only settlement and last-sale prices are used in the Metals Index’s calculation, bids and offers are not recognized; including limit-bid and limit-offer price quotes. Where no last-sale price exists, typically in the more deferred contract months, the previous days’ settlement price is used. This means that the underlying Metals Index may lag its theoretical value. This tendency to lag is evident at the end of the day when the Metals Index value is based on the settlement prices of the Benchmark Component Metals Futures Contracts, and explains why the underlying Metals Index often closes at or near the high or low for the day.
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Composition of the Metals Index
The composition of the Metals Index on any given day, as determined and published by SummerHaven Indexing, is determinative of the benchmark for USMI. Neither the Metals Index methodology nor any set of procedures, however, are capable of anticipating all possible circumstances and events that may occur with respect to the Metals Index and the methodology for its composition, weighting and calculation. Accordingly, a number of subjective judgments must be made in connection with the operation of the Metals Index that cannot be adequately reflected in this description of the Metals Index. All questions of interpretation with respect to the application of the provisions of the Metals Index methodology, including any determinations that need to be made in the event of a market emergency or other extraordinary circumstances, will be resolved by SummerHaven Indexing.
Contract Expirations
Because the Metals Index is comprised of actively traded contracts with scheduled expirations, it can be calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Metals Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry.
If a Futures Exchange ceases trading in all contract expirations relating to a particular Benchmark Component Metals Futures Contract, SummerHaven Indexing may designate a replacement contract on the particular metal. The replacement contract must satisfy the eligibility criteria for inclusion in the Metals Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Metals Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Benchmark Component Metals Futures Contract and the replacement contract with respect to contractual specifications and contract expirations.
If a Benchmark Component Metals Futures Contract is eliminated and there is no replacement contract, the underlying metal will necessarily drop out of the Metals Index. The designation of a replacement contract, or the elimination of a metal from the Metals Index because of the absence of a replacement contract, could affect the value of the Metals Index, either positively or negatively, depending on the price of the contract that is eliminated and the prices of the remaining contracts. It is impossible, however, to predict the effect of these changes, if they occur, on the value of the Metals Index.
Commodity Weighting
Each of the Benchmark Component Metals Futures Contracts will remain in the Metals Index from month to month. Weights for each of the Benchmark Component Metals Futures Contracts are determined for the next month. The methodology used to calculate the Metals Index weighting is based solely on quantitative data using observable futures prices and is not subject to human bias.
The monthly weighting selection is a three-step process based upon examination of the relevant futures prices for each metal:
| 1) | The annualized percentage price difference between the closest-to-expiration Benchmark Component Metals Futures Contract and the next closest-to-expiration Benchmark Component Metals Futures Contract is calculated for each of the 10 eligible metals on the Selection Date. The three metals with the highest percentage price difference are selected. |
| 2) | For the remaining seven eligible metals, the percentage price change of each metal over the previous year is calculated, as measured by the change in the price of the closest-to-expiration Benchmark Component Metals Futures Contract on the Selection Date from the price of the closest-to-expiration Benchmark Component Metals Futures Contract a year prior to the Selection Date. The two metals with the highest percentage price change are selected. |
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| 3) | For the five metals selected through basis (step 1) and momentum (step 2), each metal’s weight is increased by 3% above its base weighting for the following month. For the remaining five metals not selected, each metal’s weight is decreased by 3% below its base weighting for the following month. |
Due to the dynamic monthly metal weighting calculation, the individual metal weights will vary over time, depending on the price observations each month. The Selection Date for the Metals Index is the fifth business day prior to the first business day of the next calendar month.
The following graph shows the metal weights of the metals selected for inclusion in the Metals Index as of June 30, 2013.
SDMI Commodity Weights
as of June 30, 2013
Contract Selection
For each metal in the Metals Index, the index selects a specific Benchmark Component Metals Futures Contract with a tenor (i.e., contract month) among the eligible tenors (the range of contract months) based upon the relative prices of the Benchmark Component Metals Futures Contract within the eligible range of contract months. The previous notwithstanding, the contract expiration is not changed for that month if a Benchmark Component Metals Futures Contract remains in the Metals Index, as long as the contract does not enter expire or enter its notice period in the subsequent month.
Portfolio Construction
The portfolio rebalancing takes place during the Rebalancing Period. At the end of each of the days in the Rebalancing Period one fourth of the prior month portfolio positions are replaced by the new metals weights for the Benchmark Component Metals Futures Contract determined on the Selection Date.
Metals Index Total Return Calculation
The value of the Metals Index on any business day is equal to the product of (i) the value of the Metals Index on the immediately preceding business day multiplied by (ii) one plus the sum of the day’s returns for another version of the Metals Index known as the SummerHaven Dynamic Metals Index Excess Return “SDMI ER” (explained below) and one business day’s interest from the hypothetical Treasury Bill portfolio. The value of the Metals Index will be calculated and published by the NYSE Arca.
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Metals Index Base Level
The Metals Index was set to 100 on January 2, 1991.
SDMI ER Calculation
The total return of the SDMI ER reflects the percentage excess return equals the percentage change of the market values of the underlying Benchmark Component Metals Futures Contracts. During the Rebalancing Period, the Metals Index changes its contract holdings and weightings during a four day period. The value of the SDMI ER at the end of a business day “t” is equal to the SDMI ER value on day “t-1” multiplied by the sum of the daily percentage price changes of each commodity future factoring in each respective commodity future’s notional holding on day “t-1”.
Rebalancing Period
During the Rebalancing Period, existing positions are replaced by new positions based on the signals used for contract selection as outlined above. At the end of the first day of the Rebalancing Period, the signals are observed and on the second day a new portfolio is constructed that is equally weighted in terms of notional positions in the newly selected contracts.
2013 Holiday Schedule
The Metals Index will not be computed on the following weekdays in 2013:
| January | 1 | |||
| January | 21 | |||
| February | 18 | |||
| March | 29 | |||
| May | 27 | |||
| July | 4 | |||
| September | 2 | |||
| November | 28 | |||
| December | 25 |
The holiday schedule is subject to change. USMI will not accept Creation Baskets or Redemption Baskets on these days.
The table and chart below show the hypothetical performance of the Metals Index from December 31, 2002 through June 30, 2013.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
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ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
USCF HAS HAD LITTLE OR NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
Since the Metals Index was launched on September 23, 2010, there is no actual performance history of the Metals Index to present. However, the components of the Metals Index and the weighting of the components of the Metals Index are established each month based on purely quantitative data that is not subject to revisions based on other external factors. This data is available for periods prior to September 23, 2010. As a result, the table below reflects how the Metals Index would have performed from December 31, 2002 through June 30, 2013 had it been in effect during such time period. The performance data does not reflect any reinvestment or distribution of profits, commission charges, management fees or other expenses that would have been incurred in connection with operating and managing a commodity pool designed to track the Metals Index. Such fees and expenses would reduce the performance returns shown in the table below.
Hypothetical Performance Results for the period
from December 31, 2002 through June 30, 2013
| Year | Ending Level* | Annual Return | ||||||
| 2002 | 150.366 | 7.23 | % | |||||
| 2003 | 212.818 | 41.53 | % | |||||
| 2004 | 262.652 | 23.42 | % | |||||
| 2005 | 347.386 | 32.26 | % | |||||
| 2006 | 589.403 | 69.67 | % | |||||
| 2007 | 669.439 | 13.58 | % | |||||
| 2008 | 425.151 | (36.49 | )% | |||||
| 2009 | 735.929 | 73.10 | % | |||||
| 2010 | 975.580 | 32.56 | % | |||||
| 2011 | 823.695 | (15.57 | )% | |||||
| 2012 | 865.680 | 5.10 | % | |||||
| 2013 (YTD) | 693.550 | (19.88 | )% | |||||
| * | The “base level” for the Metals Index was set at 100 on January 2, 1991. The “Ending Level” represents the value of the components of the Index on the last trading day of each year and is used to illustrate the cumulative performance of the Index. |
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SummerHaven Dynamic Metals Index Year-Over-Year
Hypothetical Total Returns (1998-6/30/2013 YTD)
Source: SummerHaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
The following table compares the hypothetical total return of the Metals Index in comparison with the actual total return of three major indexes between December 31, 1997 and June 30, 2013.
| Hypothetical and Historical Results for the period from December 31, 1997 through June 30, 2013 |
||||||||||||||||
| DJ-UBS Industrial Metals TR |
RICI Metals TR |
DB LCI OY Industrial Metals TR |
SDMI TR | |||||||||||||
| Total return | 129 | % | 306 | % | 195 | % | 450 | % | ||||||||
| Average annual return (total) | 9.60 | % | 11.41 | % | 11.80 | % | 13.88 | % | ||||||||
| Annualized volatility | 23.13 | % | 18.79 | % | 21.89 | % | 19.75 | % | ||||||||
| Annualized Sharpe ratio | 0.53 | 0.73 | 0.64 | 0.83 | ||||||||||||
The table above shows the performance of the Metals Index from December 31, 1997 through June 30, 2013 in comparison with three traditional metals indices: the Rogers International Commodity Index® — Metals Total Return, Dow Jones-UBS Industrial Metals Total Return Sub-indexSM, and the Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals Total ReturnTM. The Rogers International Commodity Index® — Metals Total Return is an index of ten metals commodity futures contracts, representing commodities consumed in the global economy and is a sub-index of the Rogers International Commodity Index. The Dow Jones-UBS Industrial Metals Total Return Sub-IndexSM is currently composed of four futures contracts on industrial metals, three of which (aluminum, nickel and zinc) are traded on the London Metal Exchange and the other of which (copper) is traded on the COMEX division of the New York Mercantile Exchange. The Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals Total ReturnTM is designed to reflect the performance of certain futures contracts on aluminum, copper and zinc. The data for the SDMI Total Return Index is derived by using the Metals Index’s calculation methodology with historical prices for the futures contracts comprising the Metals Index. The information about each of the indices comes from publicly-available material about such indices but is not designed to provide a thorough overview of the methodology of each index. None of the indices have investment objectives identical to the Metals Index. As a result, there are inherent limitations in comparing the performance of such indices against the Metals Index. For more information about these indices and their methodologies, please refer to the material published by the sponsors of each such index which may be found on their websites. USMI is not responsible for any information found on such websites, and such information is not part of this prospectus.
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In the table above, “Total Return” refers to the return of the relevant index from December 31, 1997 to June 30, 2013; “Annualized Volatility” is a measure of the amount of variation or fluctuation in the returns of the relevant index. Annualized Volatility is calculated by taking the monthly standard deviation of the relevant index’s return and multiplying it by the square root of 12; and “Annualized Sharpe Ratio” is a measure of the total return of each relevant index adjusted by the risk-free interest rate (the 90 Day U.S. Treasury Bill yield) and the volatility of each index. Many investors consider volatility to be a measure of risk, and lower volatility of investment returns is considered a positive investment attribute as opposed to higher volatility. Annualized Sharpe Ratio is a standard measure for investors to compare two different investments or indexes that have different levels of volatility. If two indexes have the same total return, but one has lower Annualized Volatility, then its Annualized Sharpe Ratio will be higher. The higher the Annualized Sharpe Ratio, the better the risk-adjusted performance. Annualized Sharpe Ratio is calculated by taking the average monthly total return of the relevant index and subtracting the then current yield on the 90 Day U.S. Treasury Bill. The annualized return of this series is then divided by the Annualized Volatility of this series, and this result is the Annualized Sharpe Ratio for the relevant index. A higher Sharpe Ratio is not a guarantee that one investment or index will in the future produce better risk adjustment total returns, but management believes it is a useful tool for investors to consider when making investment decisions.
The following chart compares the hypothetical total return of the Metals Index in comparison with the actual total return of three major indexes between June 30, 2003 and June 30, 2013.
10 Year Comparison of Index Returns of the DJ-UBS IM TR,
RICI Metals TR, DB LCI OY IM TR, and the Hypothetical Returns of the SDMI TR
(6/30/03-6/30/13)
Source: SummerHaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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The following chart compares the hypothetical total return of the Metals Index in comparison with the actual total return of three major indexes over a 5 year period.
Five Year Comparison of Index Returns of the DJ-UBS IM TR,
RICI Metals TR, DB LCI OY IM TR, and the Hypothetical Returns of the SDMI TR
(6/30/08-6/30/13)
Source: SummerHaven Index Management, Bloomberg
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Critical Accounting Policies
Preparation of the condensed financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Trust’s application of these policies involves judgments and actual results may differ from the estimates used.
USCF has evaluated the nature and types of estimates that it makes in preparing the Trust’s condensed financial statements and related disclosures and has determined that the valuation of Applicable Interests, which are not traded on a United States or internationally recognized futures exchange (such as swaps and other over-the-counter contracts) involves a critical accounting policy. The values which are used by each Trust Series for its Futures Contracts are provided by its commodity broker who uses market prices when available, while over-the-counter contracts are valued based on the present value of estimated future cash flows that would be received from or paid to a third party in settlement of these derivative contracts prior to their delivery date and valued on a daily basis. In addition, each Trust Series estimates interest income on a daily basis using prevailing rates earned on its cash and cash equivalents. These estimates are adjusted to the actual amount received on a monthly basis and the difference, if any, is not considered material.
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Liquidity and Capital Resources
None of the Trust Series has made, and does not anticipate making, use of borrowings or other lines of credit to meet its obligations. Each Trust Series has met, and it is anticipated that each Trust Series will continue to meet, its liquidity needs in the normal course of business from the proceeds of the sale of its investments, or from the Treasuries, cash and/or cash equivalents that it intends to hold at all times. Each Trust Series’ liquidity needs include: redeeming units, providing margin deposits for its existing Futures Contracts or the purchase of additional Futures Contracts and posting collateral for its over-the-counter Applicable Interests, respectively, if applicable, and, except as noted below, payment of its expenses, summarized below under “Contractual Obligations.”
Each Trust Series currently generates cash primarily from: (i) the sale of baskets consisting of 50,000 units (“Creation Baskets”) and (ii) income earned on Treasuries, cash and/or cash equivalents. Each Trust Series has allocated substantially all of its net assets to trading in Applicable Interests. Each Trust Series invests in Applicable Interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments in Applicable Interests. A significant portion of each Trust Series’ NAV is held in cash and cash equivalents that are used as margin and as collateral for its trading in Applicable Interests. The balance of the assets is held in each Trust Series’ account at its custodian bank and in Treasuries at the FCM. Income received from any investments in money market funds and Treasuries by a Trust Series will be paid to such Trust Series. During the six months ended June 30, 2013, each Trust Series’ expenses exceeded the income it earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets. During the six months ended June 30, 2013, each Trust Series used other assets to pay expenses, which could cause a drop in its NAV over time. To the extent expenses exceed income, each Trust Series’ NAV will be negatively impacted.
Each Trust Series’ investments in Applicable Interests may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, most commodity exchanges limit the fluctuations in futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the specified daily limit. Such market conditions could prevent a Trust Series from promptly liquidating its positions in Futures Contracts. During the six months ended June 30, 2013, none of the Trust Series purchased or liquidated any of its positions while daily limits were in effect; however, no Trust Series can predict whether such an event may occur in the future.
Prior to the initial offering of each Trust Series, all payments with respect to each Trust Series’ expenses are paid by USCF. None of the Trust Series has an obligation or intention to refund such payments made by USCF. USCF is under no obligation to pay any Trust Series’ future expenses. Since the initial offering of units, each Trust Series has been responsible for expenses relating to: (i) management fees, (ii) brokerage fees and commissions, (iii) ongoing registration expenses in connection with offers and sales of its units subsequent to the initial offering, (iv) other expenses, including tax reporting costs, (v) the fees of the Trustee in connection with its services as Delaware trustee of the Trust, (vi) fees and expenses of the independent directors of USCF and (vii) other extraordinary expenses not in the ordinary course of business, while USCF has been responsible for expenses relating to the fees of the Trust Series’ Marketing Agent, Administrator and Custodian, the trading advisory and licensing fees of SummerHaven and offering expenses relating to the initial offering of units of each Trust Series. If USCF and each Trust Series are unsuccessful in raising sufficient funds to cover these respective expenses or in locating any other source of funding, one or more of the Trust Series could terminate and investors may lose all or part of their investment.
Market Risk
Trading in Applicable Interests such as Futures Contracts involves each Trust Series entering into contractual commitments to purchase or sell specified amounts of commodities at a specified date in the future. The aggregate market value of the contracts will significantly exceed each Trust Series’ future cash requirements since each Trust Series intends to close out its open positions prior to settlement. As a result, each Trust Series is generally only subject to the risk of loss arising from the change in value of the contracts. Each Trust Series considers the “fair value” of its derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with each Trust Series’ commitments to purchase a specific commodity will be limited to the aggregate market value of the contracts held.
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Each Trust Series’ exposure to market risk depends on a number of factors, including the markets for commodities, the volatility of interest rates and foreign exchange rates, the liquidity of the Applicable Interest markets and the relationships among the contracts held by each such Trust Series. The limited experience that each Trust Series has had in utilizing its model to trade in Applicable Interests in a manner intended to track the changes in the Applicable Index, as well as drastic market occurrences, could ultimately lead to the loss of all or substantially all of an investor’s capital.
Credit Risk
When a Trust Series enters into Futures Contracts and Other Related Investments, it is exposed to the credit risk that the counterparty will not be able to meet its obligations. The counterparty for the Futures Contracts traded on the Futures Exchanges is the clearinghouse associated with the particular exchange. In general, in addition to margin required to be posted by the clearinghouse in connection with cleared trades, clearinghouses are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their members and, therefore, this additional member support should significantly reduce credit risk. Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of banks or other financial institutions. Unlike in the case of exchange-traded Futures Contracts, the counterparty to an over-the-counter contract is generally a single bank or other financial institution. As a result, there will be greater counterparty credit risk in over-the-counter transactions. There can be no assurance that any counterparty, clearinghouse, or their members or their financial backers will satisfy their obligations to a Trust Series in such circumstances.
USCF attempts to manage the credit risk of each Trust Series by following various trading limitations and policies. In particular, each Trust Series generally posts margin and/or holds liquid assets that are approximately equal to the market value of its obligations to counterparties under the Futures Contracts and Other Related Investments it holds. USCF has implemented procedures that include, but are not limited to, executing and clearing trades and entering into over-the-counter transactions only with creditworthy parties and/or requiring the posting of collateral or margin by such parties for the benefit of each Trust Series to limit its credit exposure. Newedge USA, LLC, each Trust Series’ commodity broker, or any other broker that may be retained by a Trust Series in the future, when acting as the Trust Series’ FCM in accepting orders to purchase or sell Futures Contracts on United States exchanges, is required by CFTC regulations to separately account for and segregate as belonging to a Trust Series, all assets of a Trust Series relating to domestic Futures Contracts trading. These FCMs are not allowed to commingle a Trust Series’ assets with their other assets. In addition, the CFTC requires commodity brokers to hold in a secure account a Trust Series’ assets related to foreign Futures Contracts trading. During the six months ended June 30, 2013, the only foreign exchanges on which USCI made investments were the ICE Futures, which is a London based futures exchange, and the LME, which is a London based metal commodities exchange. Those Futures Contracts are denominated in U.S. dollars. During the six months ended June 30, 2013, CPER did not make investments on any foreign exchanges. During the six months ended June 30, 2013, the only foreign exchange on which USAG made investments was the ICE Futures. Those Futures Contracts are denominated in U.S. dollars. During the six months ended June 30, 2013, the only foreign exchange on which USMI made investments was the LME. Those Futures Contracts are denominated in U.S. dollars.
If, in the future, a Trust Series purchases over-the-counter contracts, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this quarterly report on Form 10-Q for a discussion of over-the-counter contracts.
As of June 30, 2013, each of USCI, CPER, USAG and USMI held cash deposits and investments in Treasuries in the amount of $525,418,382, $2,304,357, $2,399,851 and $2,372,760, respectively, with the custodian and FCM. Some or all of these amounts may be subject to loss should the Trust Series’ custodian and/or FCM cease operations.
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Off Balance Sheet Financing
As of June 30, 2013, neither the Trust nor any Trust Series had any loan guarantee, credit support or other off-balance sheet arrangement of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions relating to certain risks that service providers undertake in performing services which are in the best interests of any Trust Series. While each Trust Series’ exposure under these indemnification provisions cannot be estimated, they are not expected to have a material impact on any Trust Series’ financial position.
European Sovereign Debt
None of the Trust Series had direct exposure to European sovereign debt as of June 30, 2013 or had direct exposure to European sovereign debt as of the filing of this quarterly report on Form 10-Q.
Redemption Basket Obligation
In order to meet its investment objective and pay its contractual obligations described below, each Trust Series requires liquidity to redeem units, which redemptions must be in blocks of 50,000 units effective as of May 1, 2012 called “Redemption Baskets.” (Prior to May 1, 2012, the size of the Redemption Basket was 100,000 units). Each Trust Series has to date satisfied this obligation by paying from the cash or cash equivalents it holds or through the sale of its Treasuries in an amount proportionate to the number of units being redeemed. From July 1, 2011 through June 30, 2013 (and continuing at least through May 1, 2014), Authorized Purchasers pay USCI $350 for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets; prior to July 1, 2011, Authorized Purchasers paid USCI $1,000 for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets. From May 1, 2012 through June 30, 2013 (and continuing at least through May 1, 2014), Authorized Purchasers pay each of CPER, USAG and USMI $350 for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets; prior to May 1, 2012, Authorized Purchasers paid $1,000 for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets.
Contractual Obligations
The Trust’s (and each series thereunder) primary contractual obligations are with USCF and certain other service providers. USCF, in return for its services, is entitled to a management fee calculated as a fixed percentage of a Trust Series’ NAV. Effective as of May 29, 2012 (and expected to continue at least through May 1, 2014), USCF voluntarily waived the management fee paid by each of CPER and USAG from 0.95% to 0.65% and 0.80% per annum of average daily total net assets, respectively. Effective as of May 30, 2012 (and expected to continue at least through May 1, 2014), USCF voluntarily waived the management fee paid by USMI from 0.95% to 0.70% per annum of average daily total net assets. The reduced fee for USMI became operational as of June 19, 2012, the date USMI became listed on the NYSE Arca. Ongoing fees, costs and expenses of its operation for which a Trust Series is responsible include:
| • | brokerage and other fees and commissions incurred in connection with the trading activities of each Trust Series; |
| • | expenses incurred in connection with registering additional units of each Trust Series or offering units of each Trust Series after the time any units of each Trust Series have begun trading on the NYSE Arca; |
| • | the routine expenses associated with distribution, including printing and mailing, of any monthly, annual and other reports to unitholders required by applicable U.S. federal and state regulatory authorities; |
| • | payment for routine services of the Trustee, legal counsel and independent accountants; |
| • | payment for fees associated with tax accounting and reporting, routine accounting, bookkeeping, whether performed by an outside service provider or by affiliates of USCF; |
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| • | costs and expenses associated with investor relations and services; |
| • | the payment of any distributions related to redemption of units; |
| • | payment of all federal, state, local or foreign taxes payable on the income, assets or operations of each Trust Series and the preparation of all tax returns related thereto; |
| • | fees and expenses of the independent directors of USCF; and |
| • | extraordinary expenses (including, but not limited to, indemnification of any person against liabilities and obligations to the extent permitted by law and required under the Trust Agreement and the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation). |
While USCF has agreed to pay registration fees to the SEC, FINRA, NYSE Arca or any other regulatory agency or exchange in connection with the initial offer and sale of the units and the legal, printing, accounting and other expenses associated with such registration, each Trust Series is responsible for any registration fees and related expenses incurred in connection with any subsequent offer and sale of its units after the initial offering of units.
Each Trust Series pays its own brokerage and other transaction costs. Each Trust Series pays fees to FCMs in connection with its transactions in Futures Contracts. For the six months ended June 30, 2013, FCM fees were approximately 0.08% of average daily total net assets for USCI, approximately 0.03% of average daily total net assets for CPER, approximately 0.08% of average daily total net assets for USAG and approximately 0.03% of average daily total net assets for USMI. In general, transaction costs on over-the-counter Applicable Interests and on Treasuries and other short-term securities are embedded in the purchase or sale price of the instrument being purchased or sold, and may not readily be estimated. USCF had voluntarily agreed to pay certain expenses normally borne by USCI to the extent that such expenses exceeded 0.15% (15 basis points) of USCI’s NAV, on an annualized basis, through March 31, 2011. As of March 31, 2011, the expense waiver was no longer in effect for USCI. USCF has voluntarily agreed to pay certain expenses normally borne by each of CPER, USAG and USMI to the extent that such expenses exceed 0.15% (15 basis points) of each of CPER’s, USAG’s and USMI’s NAV, on an annualized basis, through at least December 31, 2013. USCF has no obligation to continue such payments into subsequent periods. This voluntary expense waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 5 in Item 1 of this quarterly report on Form 10-Q.
The parties cannot anticipate the amount of payments that will be required under these arrangements for future periods, as each Trust Series’ NAVs and trading levels to meet its investment objective will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option to renew, or, in some cases, are in effect for the duration of a Trust Series’ existence. Either party may terminate these agreements earlier for certain reasons described in the agreements.
As of June 30, 2013, USCI’s portfolio consisted of 14,662 Futures Contracts traded on the Futures Exchanges, CPER’s portfolio consisted of 28 Futures Contracts traded on the COMEX, USAG’s portfolio consisted of 70 Futures Contracts traded on the Futures Exchanges and USMI’s portfolio consisted of 73 Futures Contracts traded on the Futures Exchanges. For a list of each of USCI’s, CPER’s, USAG’s and USMI’s current holdings, please see USCI’s website at www.unitedstatescommodityindexfund.com, CPER’s website at www.unitedstatescopperindexfund.com, USAG’s website at www.unitedstatesagricultureindexfund.com and USMI’s website at www.unitedstatesmetalsindexfund.com. See “Portfolio Holdings” for a complete list of Futures Contracts held by each of USCI, CPER, USAG and USMI during the six months ended June 30, 2013.
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Over-the-Counter Derivatives (Including Spreads and Straddles)
In the future, a Trust Series may purchase over-the-counter contracts (“OTC Contracts”). Unlike most exchange-traded futures contracts or exchange-traded options on such futures, each party to an OTC Contract bears the credit risk that the other party may not be able to perform its obligations under its contract.
Swap transactions, like other financial transactions, involves a variety of significant risks. The specific risks presented by a particular swap transaction necessarily depend upon the terms and circumstances of the transaction. In general, however, all swap transactions involve some combination of market risk, credit risk, counterparty risk, funding risk, liquidity risk and operational risk.
Highly customized swap transactions in particular may increase liquidity risk, which may result in a suspension of redemptions. Highly leveraged transactions may experience substantial gains or losses in value as a result of relatively small changes in the value or level of an underlying or related market factor.
In evaluating the risks and contractual obligations associated with a particular swap transaction, it is important to consider that a swap transaction may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Therefore, it may not be possible for USCF to modify, terminate or offset a Trust Series’ obligations or its exposure to the risks associated with a transaction prior to its scheduled termination date.
To reduce the credit risk that arises in connection with such contracts, a Trust Series will generally enter into an agreement with each counterparty based on the Master Agreement published by ISDA that provides for the netting of its overall exposure to its counterparty if the counterparty is unable to meet its obligations to the Trust Series due to the occurrence of a specified event, such as the insolvency of the counterparty.
A Trust Series assesses or reviews, as appropriate, the creditworthiness of each potential or existing counterparty to an OTC Contract pursuant to guidelines approved by USCF’s Board. Furthermore, USCF on behalf of a Trust Series only enters into OTC Contracts with counterparties who are, or are affiliates of, (a) banks regulated by a United States federal bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies domiciled in the United States, or (d) producers, users or traders of energy, whether or not regulated by the CFTC. Any entity acting as a counterparty shall be regulated in either the United States or the United Kingdom unless otherwise approved by the Board after consultation with its legal counsel. Existing counterparties are also reviewed periodically by USCF. A Trust Series will also require that the counterparty be highly rated and/or provide collateral or other credit support. Even if collateral is used to reduce counterparty credit risk, sudden changes in the value of OTC transactions may leave a party open to financial risk due to a counterparty default since the collateral held may not cover a party’s exposure on the transaction in such situations.
In general, valuing OTC derivatives is less certain than valuing actively traded financial instruments such as exchange-traded futures contracts and securities or cleared swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated, and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers and dealers generally quote indicative prices or terms for entering into or terminating OTC Contracts, they typically are not contractually obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent value for an outstanding OTC derivatives transaction.
During the six months ended June 30, 2013, none of the Trust Series employed any hedging methods such as those described above since all of its investments were made over an exchange. Therefore, during such period, none of the Trust Series’ was exposed to counterparty risk.
Each Trust Series anticipates that the use of Other Related Investments together with its investments in Futures Contracts will produce price and total return results that closely track the investment goals of such Trust Series. However, there can be no assurance of this. OTC Contracts may result in higher transaction-related expenses than the brokerage commissions paid in connection with the purchase of Futures Contracts, which may impact a Trust Series’ ability to successfully track its Applicable Index.
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| Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
The Trust and each Trust Series maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the Trust’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.
The duly appointed officers of USCF, including its chief executive officer and chief financial officer, who perform functions equivalent to those of a principal executive officer and principal financial officer of the Trust if the Trust had any officers, have evaluated the effectiveness of the Trust’s and each Trust Series’ disclosure controls and procedures and have concluded that the disclosure controls and procedures of the Trust and each Trust Series have been effective as of the end of the period covered by this quarterly report on Form 10-Q.
Change in Internal Control Over Financial Reporting
There were no changes in the Trust’s or any Trust Series’ internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s or any Trust Series’ internal control over financial reporting.
Part II. OTHER INFORMATION
| Item 1. | Legal Proceedings. |
Not applicable.
| Item 1A. | Risk Factors. |
There have been no material changes to the risk factors previously disclosed in the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 13, 2013.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
Not applicable.
| Item 3. |
Defaults Upon Senior Securities. |
Not applicable.
| Item 4. |
Mine Safety Disclosures.
|
Not applicable.
| Item 5. | Other Information. |
Monthly Account Statements
Pursuant to the requirement under Rule 4.22 under the Commodity Exchange Act, each month the Trust and each Trust Series publish account statements for the Trust Series’ unitholders, which include Statements of Income (Loss) and Statements of Changes in Net Asset Value. The account statements are furnished to the SEC on a current report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act and posted each month on each Trust Series’ website at www.unitedstatescommodityindexfund.com, www.unitedstatescopperindexfund.com, www.unitedstatesagricultureindexfund.com and www.unitedstatesmetalsindexfund.com.
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| Item 6. | Exhibits. |
Listed below are the exhibits, which are filed as part of this quarterly report on Form 10-Q (according to the number assigned to them in Item 601 of Regulation S-K):
|
Exhibit Number |
Description of Document | |
| 31.1(1) | Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2(1) | Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1(1) | Certification by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2(1) | Certification by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS(2) | XBRL Instance Document. | |
| 101.SCH(2) | XBRL Taxonomy Extension Schema. | |
| 101.CAL(2) | XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF(2) | XBRL Taxonomy Extension Definition Linkbase. | |
| 101.LAB(2) | XBRL Taxonomy Extension Label Linkbase. | |
| 101.PRE(2) | XBRL Taxonomy Extension Presentation Linkbase. |
| (1) | Filed herewith. |
| (2) | In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
United States Commodity Index Funds Trust (Registrant)
By: United States Commodity Funds LLC, its Sponsor
| By: | /s/ Nicholas D. Gerber | |
| Nicholas D. Gerber | ||
| President and Chief Executive Officer | ||
| (Principal executive officer) | ||
Date: August 9, 2013
| By: | /s/ Howard Mah | |
| Howard Mah | ||
| Chief Financial Officer | ||
| (Principal financial and accounting officer) | ||
Date August 9, 2013
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