Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and the notes thereto of the Trust included elsewhere in this annual report on Form 10-K.
Forward-Looking Information
This annual report on Form 10-K, 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. The Trust believes these factors include, but are not limited to, the following: changes in inflation in the United States, movements in U.S. and foreign currencies, market volatility in the commodities markets, in part attributable to the COVID-19 pandemic that began in February 2020 and Russia’s invasion of Ukraine in February 2022. 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 annual report on Form 10-K on information available to it on the date of this annual report on Form 10-K, 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 files in the future with the 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
Each Trust Series is a commodity pool that issues shares representing fractional undivided beneficial interests in such Trust Series that may be purchased and sold on the NYSE Arca. The Trust Series are series of the Trust, a Delaware statutory trust formed on December 21, 2009.
United States Commodity Index Fund
USCI invests in futures contracts for commodities that are traded on the Futures Exchanges and, to a lesser extent, in order to comply with regulatory requirements or in view of market conditions, Other Commodity-Related Investments. Market conditions that USCF currently anticipates could cause USCI to invest in Other Commodity Related Investments include, but are not limited to, those allowing USCI to obtain greater liquidity or to execute transactions with more favorable pricing.
The investment objective of USCI is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect the daily changes in percentage terms of the SummerHaven Dynamic Commodity Index Total Return SM (the “SDCI”), less USCI’s expenses.
USCI seeks to achieve its investment objective by investing so that the average daily percentage change in USCI’s NAV for any period of 30 successive valuation days will be within plus/minus 10 percent (10%) of the average daily percentage change in the price of the SDCI over the same period. The SDCI is designed to reflect the performance of a diversified group of commodities. The SDCI is owned and maintained by SummerHaven Index Management, LLC (“SHIM”) and is calculated and published by Bloomberg L.P. Futures contracts for the commodities comprising the SDCI are traded on the New York Mercantile Exchange (“NYMEX”), ICE Futures (“ICE Futures”), Chicago Board of Trade (“CBOT”), Chicago Mercantile Exchange (“CME”), London Metal Exchange (“LME”), and Commodity Exchange, Inc. (“COMEX”) (the NYMEX, ICE Futures, CBOT, CME, LME and COMEX, collectively, the “Futures Exchanges”) and are collectively referred to herein as “Futures Contracts.” The Futures Contracts that at any given time make up the SDCI are referred to herein as “Benchmark Component Futures Contracts.” The relative weighting of the Benchmark Component Futures Contracts will change on a monthly basis, based on quantitative formulas relating to the prices of the Benchmark Component Futures Contracts developed by SHIM.
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USCI seeks to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Futures Contracts. Then, if constrained by regulatory requirements or in view of market conditions, USCI will invest next in other Futures Contracts based on the same 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 Futures Contracts if one or more other Futures Contracts is not available. When USCI has invested to the fullest extent possible in exchange-traded futures contracts, USCI may then invest in other contracts and instruments based on the Benchmark Component Futures Contracts, other Futures Contracts or the commodities included in the SDCI, 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 Futures Contracts and other contracts and instruments based on the Benchmark Component Futures Contracts are collectively referred to as “Other Commodity-Related Investments,” and together with Benchmark Component Futures Contracts and other Futures Contracts, “Commodity Interests.”
USCI seeks to achieve its investment objective by investing so that the average daily percentage change in USCI’s NAV for any period of 30 successive valuation days will be within plus/minus 10 percent (10%) of the average daily percentage change in the price of the SDCI over the same period. USCF believes that the market arbitrage opportunities will cause the daily changes in USCI’s share price on the NYSE Arca on a percentage basis to closely track the daily changes in USCI’s per share NAV on a percentage basis. USCF believes that the net effect of this expected relationship and the expected relationship described above between USCI’s per share NAV and the SDCI will be that the daily changes in the price of USCI’s shares on the NYSE Arca on a percentage basis will closely track the daily changes in the SDCI on a percentage basis, less USCI’s expenses. While USCI is composed of Benchmark Component Futures Contracts and is therefore a measure of the prices of the corresponding commodities comprising the SDCI for future delivery, there is nonetheless expected to be a reasonable degree of correlation between the SDCI and the cash or spot prices of the commodities underlying the Benchmark Component Futures Contracts.
Investors should be aware that USCI’s investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Futures Contracts 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. This is because natural market forces called contango and backwardation have impacted the total return on an investment in USCI’s shares during the past year relative to a hypothetical direct investment in the various commodities and, in the future, it is likely that the relationship between the market price of USCI’s shares and changes in the spot prices of the underlying commodities will continue to be so impacted by contango and backwardation. (It is important to note that the disclosure above ignores the potential costs associated with physically owning and storing the commodities, which could be substantial.) As of December 31, 2022, USCI held 911 Futures Contracts on the NYMEX, held 2,499 Futures Contracts on the ICE Futures, held 1,419 Futures Contracts on the CBOT, did not hold any Futures Contracts on the CME, held 1,017 Futures Contracts on the LME and held 191 Futures Contracts on the COMEX, totaling 6,037 futures contracts.
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. Market conditions that USCF currently anticipates could cause CPER to invest in Other Copper-Related Investments include, but are not limited to, 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 shares’ per share NAV to reflect the daily changes in percentage terms of the SummerHaven Copper Index Total Return SM (the “SCI”), less CPER’s expenses. CPER seeks to achieve its investment objective by investing so that the average daily percentage change in CPER’s NAV for any period of 30 successive valuation days will be within plus/minus 10 percent (10%) of the average daily percentage change in the price of the Benchmark Component Copper Futures Contracts over the same period. The SCI is designed to reflect the performance of the investment returns from a portfolio of copper futures contracts on the COMEX. The SCI is owned and maintained by SHIM and calculated and published by the NYSE Arca. The SCI is comprised of either one 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 SHIM. The Eligible Copper Futures Contracts that at any given time make up the SCI 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 based on the same copper 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 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 other items based on 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 collectively as “Other Copper-Related Investments,” and together with Benchmark Component Copper Futures Contracts and other Eligible Copper Futures Contracts, “Copper Interests.”
CPER seeks to achieve its investment objective by investing so that the average daily percentage change in CPER’s NAV for any period of 30 successive valuation days will be within plus/minus ten percent (10%) of the average daily percentage change in the price of the Benchmark Component Copper Futures Contracts over the same period. USCF believes that market arbitrage opportunities will cause daily changes in CPER’s share price on the NYSE Arca on a percentage basis, to closely track the daily changes in CPER’s per share NAV on a percentage basis. USCF believes that the net effect of this expected relationship and the expected relationship described above between CPER’s per share NAV and the SCI will be that the daily changes in the price of CPER’s shares on the NYSE Arca on a percentage basis will closely track the daily changes in the SCI on a percentage basis, less CPER’s expenses. While CPER is composed of Benchmark Component Copper Futures Contracts and is therefore a measure of the prices of the corresponding commodities comprising the SCI for future delivery, there is nonetheless expected to be a reasonable degree of correlation between the SCI and the cash or spot prices of the commodities underlying the Benchmark Component Copper Futures Contracts.
Investors should be aware that CPER’s investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Copper Futures Contracts or the prices of any particular group of futures contracts. CPER will not seek to achieve its stated investment objective over a period of time greater than one day. This is because natural market forces called contango and backwardation have impacted the total return on an investment in CPER’s shares during the past year relative to a hypothetical direct investment in various commodities and, in the future, it is likely that the relationship between the market price of CPER’s shares and changes in the spot prices of the underlying commodities will continue to be so impacted by contango and backwardation. (It is important to note that the disclosure above ignores the potential costs associated with physically owning and storing the commodities, which could be substantial.) CPER’s shares began trading on November 15, 2011. As of December 31, 2022, CPER held 1,779 Futures Contracts on the COMEX.
Other Defined Terms
The SCI, together with the SDCI, are referred to throughout this annual report on Form 10-K collectively as the “Applicable Index” or “Indices.”
Benchmark Component Futures Contracts and Benchmark Component Copper Futures Contracts are referred to throughout this annual report on Form 10-Q collectively as “Applicable Benchmark Component Futures Contracts.”
Other Commodity-Related Investments and Other Copper-Related Investments are collectively referred to herein as “Other Related Investments.” Commodity Interests and Copper Interests are collectively referred to herein as “Applicable Interests” throughout this annual report on Form 10-K.
Regulatory Disclosure
The regulation of commodity interest trading in the United States and other countries is an evolving area of the law. Below are certain key regulatory requirements that are, or may be, relevant to the Trust Series. The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of the SEC, Financial Industry Regulatory Authority (“FINRA”), CFTC, NFA, the futures exchanges, clearing organizations and other regulatory bodies. Pending final resolution of all applicable regulatory requirements, some examples of how new rules and regulations could impact the Trust Series are discussed in “Item 1. Business” in this annual report on Form 10-K.
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Exchange Accountability Levels, Position Limits and Price Fluctuation Limits. Designated contract markets (“DCMs”), such as the NYMEX and ICE Futures, 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. These levels and position limits apply to the futures contracts that each Trust Series invests in to meet the investment objective of such Trust Series. In addition to accountability levels and position limits, the NYMEX and ICE Futures also set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
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 December 31, 2022, USCI held 911 Futures Contracts on the NYMEX, held 2,499 Futures Contracts on the ICE Futures, held 1,419 Futures Contracts on the CBOT, did not hold any Futures Contracts on the CME, held 1,017 Futures Contracts on the LME and held 191 Futures Contracts on the COMEX, totaling 6,037 futures contracts. As of December 31, 2022, CPER held 1,779 Futures Contracts on the COMEX. For the fiscal year ended December 31, 2022, no Trust Series exceeded accountability levels imposed by the NYMEX, COMEX, CME, CBOT, LME 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 fiscal year ended December 31, 2022, no Trust Series exceeded position limits imposed by the NYMEX, COMEX, CME, CBOT, LME or ICE Futures.
Federal Position Limits
In October 2020, the CFTC adopted a rule to establish federal position limits for 25 core referenced futures contracts (comprised of agricultural, energy and metals futures contracts), futures and options linked to the core referenced futures contracts, and swaps that are economically equivalent to the core referenced futures contracts (the “Position Limits Rule”). The limits for futures contracts are currently in effect; the limits for economically equivalent swaps will become effective in 2023.
Certain Applicable Benchmark Component Futures Contracts are subject to position limits under the Position Limits Rule, and the trading by each Trust Series does not qualify for an exemption therefrom. Accordingly, the Position Limits Rule could negatively impact the ability of a Trust Series to meet its investment objectives by inhibiting USCF’s ability to effectively invest the proceeds from sales of Creation Baskets of the Trust Series in particular amounts and types of its permitted investments.
Margin for OTC Swaps
Rules put in place by U.S. federal banking regulators, the CFTC and the SEC require the daily exchange of variation margin and initial margin for swaps between swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (“Swap Entities”) and swaps between Swap Entities and their counterparties that are “financial end-users” (such rules, the “Margin Rules”). The Margin Rules require Swap Entities to exchange variation margin with all of their counterparties who are financial end-users. The minimum variation margin amount is the daily mark-to-market change in the value of the swap, taking into account the amount of variation margin previously posted or collected. Swap Entities are required to exchange initial margin with their financial end-users who have “material swaps exposure” (i.e., an average daily aggregate notional of $8 billion or more in non-cleared swaps calculated in accordance with the Margin Rules). The Margin Rules specify the types of collateral that may be posted or collected as initial margin or variation margin (generally cash, certain government, government-sponsored enterprise securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold) and sets forth haircuts for certain collateral asset classes.
No Trust Series is a Swap Entity under the Margin Rules, but each is a financial end-user. Accordingly, each Trust Series will be subject to the variation margin requirements of the Margin Rules for any swaps that it enters into. However, no Trust Series has material swaps exposure and, accordingly, no Trust Series will be subject to the initial margin requirements of the Margin Rules.
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Mandatory Trading and Clearing of Swaps
CFTC regulations require that certain swap transactions be executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing organizations (“derivative clearing organizations” (“DCOs”)), if the CFTC mandates the central clearing of a particular class of swap and such swap is “made available to trade” on a swap execution facility. Currently, swap dealers, major swap participants, commodity pools, certain private funds and entities predominantly engaged in activities that are financial in nature are required to execute on a swap execution facility, and clear, certain interest rate swaps and index-based credit default swaps. As a result, if a Trust Series enters into an interest rate or index-based credit default swap that is subject to these requirements, such swap will be required to be executed on a swap execution facility and centrally cleared. Mandatory clearing and “made available to trade” determinations with respect to additional types of swaps may be issued in the future, and, when finalized, could require each Trust Series to electronically execute and centrally clear certain OTC instruments presently entered into and settled on a bi-lateral basis. If a swap is required to be cleared, initial and variation margin requirements are set by the relevant clearing organization, subject to certain regulatory requirements and guidelines. Additional margin may be required and held by a Trust Series’ FCM.
Other Requirements for Swaps
Swaps that are not required to be cleared and executed on a SEF but that are executed bilaterally are also subject to various requirements pursuant to CFTC regulations, including, among other things, reporting and recordkeeping requirements and, depending on the status of the counterparties, trading documentation requirements and dispute resolution requirements.
Derivatives Regulations in Non-U.S. Jurisdictions
In addition to U.S. laws and regulations, a Trust Series may be subject to non-U.S. derivatives laws and regulations if it engages in futures and/or swap transactions with non-U.S. persons. For example, each Trust Series may be impacted by European laws and regulations to the extent that it engages in futures transactions on European exchanges or derivatives transactions with European entities. Other jurisdictions impose requirements applicable to futures and derivatives that are similar to those imposed by the U.S., including position limits, margin, clearing and trade execution requirements.
The CFTC is generally 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.
Commodity Markets
Commodity Futures Price Movements
Year Ended December 31, 2022
As measured by the four major diversified commodity indexes listed below, commodity futures prices exhibited a strong upward trend during the year ended December 31, 2022. The table below compares the total returns of the SDCI to the three major diversified commodity indexes over this time period.
SummerHaven Dynamic Commodity Index Total Return SM (“SDCI”) (1)
31.65
%
S&P GSCI Commodity Index (GSCI ® ) Total Return (2)
25.99
%
Bloomberg Commodity Index Total Return (2)
16.09
%
Deutsche Bank Liquid Commodity Index-Optimum Yield Total Return TM(2)
21.23
%
(1) The inception date for the SummerHaven Dynamic Commodity Index Total Return SM is December 2009.
(2) Source: Bloomberg
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The value of the SDCI as of January 1, 2022 was $1,468.49. As of December 31, 2022, the value of the SDCI was $1,933.23, up approximately 31.65% over the year ended December 31, 2022.
Of the 27 components of SummerHaven Dynamic Commodity Index (SDCI), sixteen had positive returns for first-half 2022. Gas Oil returned 57.7% in the first-half 2022 while Copper declined by -17.4%. The best performing sector was energy (up 57.7%). Commodities have continued the 2021 rally as inflation grew from 1.4% in 2020 to 9.1% in 2022. Inflation is a headwind for stocks and bonds and a tailwind for real assets such as commodities. Historically, commodities have been a hedge against inflation and positive inflation shocks. In 2022, as the fact of high inflation became more evident, stocks and Bonds suffered losses while commodities continued to perform well. The age-old wisdom of stock-bond diversification has been challenged in an unprecedented way. Since the inception in 1976 of US aggregate bond index, 2022 is the only year where both US stocks and bonds have experience significant negative returns (-20.0% and -10.3% respectively). In contrast, USCI’s NAV was up 18.47% for the nine months ended September 30, 2022.
The return of approximately 31.65% on the SDCI 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 share NAV began the year at $43.43 and ended the year at $56.23 on December 31, 2022, an increase of approximately 29.47% over the year. See “Tracking Each Trust Series’ Benchmark” below for information about how expenses and income affect USCI’s per share NAV.
The war in Ukraine has raised concerns among investors that a global shortage of many commodities is possible. Russia, Ukraine, and Belarus are major producers and exporters of many metals, grains, and energy products that are critical to global supply. Substantial productive capacity has been halted in Ukraine, and Russia may be unable or unwilling to export what it produces. This has put upward pressure on commodity prices globally, beyond the impact of bullish fundamentals that were already in place. Should the war continue or escalate, or if sanctions or retaliation lead to a further reduction in production and exports from Ukraine, Russia, and Belarus, then commodity prices could rise further and prices could become more volatile. Conversely, should concerns about commodity shortages resulting from the war in Ukraine ebb due to an expected or actual resolution of the war, then commodity prices could stabilize or decline.
Copper Markets
Copper Futures Price Movements
Year Ended December 31, 2022
As measured by the two major copper indexes, copper futures prices exhibited an upward trend during the year ended December 31, 2022. The table below compares the total returns of the SCI to the Bloomberg Copper Subindex Total Return over this time period.
SummerHaven Copper Index Total Return SM (“SCI”) (1)
(14.03)
%
Bloomberg Copper Subindex Total Return (2)
(13.54)
%
(1) The inception date for the SummerHaven Copper Index Total Return TM is November 2010.
(2) Source: Bloomberg
The value of the SCI as of January 1, 2022 was $1,422.52. As of December 31, 2022, the value of the SCI was $1,222.97, down approximately (14.03)% over the year ended December 31, 2022.
The return of approximately 14.03% on the SCI 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 share NAV began the year at $27.24 and ended the year at $23.07 on December 31, 2022, a decrease of approximately (15.31)% over the year. See “Tracking Each Trust Series’ Benchmark” below for information about how expenses and income affect CPER’s per share NAV.
During the year ended December 31, 2022, the price of the front month copper futures contract traded in a range between $3.2105 per pound and $4.9290 per pound. Prices decreased by 16.78% between December 31, 2021 to December 31, 2022 finishing the period at $3.8105. Copper futures markets rose dramatically from 2020 to mid-April 2022. Copper prices declined sharply from late spring to mid-summer due to concerns about demand from the manufacturing sector, monetary tightening and related concerns about a slowdown in global growth, and COVID-19 flare ups in China. In the second half of 2022, Copper recovered some of it's earlier losses for the year, partially as a result of China reopening its economy. Long-term, copper demand is likely to remain robust and supply is also likely to remain constrained and slow to respond to demand increases.
The war in Ukraine has affected many commodities in which Russia, Ukraine, and Belarus are major producers and exports, such as certain metals, grains, and energy products. However, copper is not one of the metals that depends heavily on supply from the region. As a result, copper prices rose only modestly from the outbreak of the war in comparison to other metals, such as Nickel. Copper supply is more affected by events, such as protests and labor strikes, that impact mining in south American nations, including Chile and Peru.
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Meanwhile, copper demand typical depends on the state of the global economy, particularly China, which drives industrial, commercial, and manufacturing use.
Valuation of Futures Contracts and the Computation of the Per Share NAV
Each Trust Series’ NAV is calculated once each NYSE Arca trading day. The per share 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.
Results of Operations
On July 30, 2010, USCI received a notice of effectiveness from the SEC for its registration of 50,000,000 shares on Form S-1 with the SEC. On August 10, 2010, USCI listed its shares on the NYSE Arca under the ticker symbol “USCI.” USCI established its initial offering per share NAV by setting the price at $50 and issued 100,000 shares to the initial Authorized Participant, Merrill Lynch Professional Clearing Corp., 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 shares be outstanding at the beginning of the trading day on the NYSE Arca, USCF purchased the initial Creation Basket from the initial Authorized Participant at the initial offering price. The $1,000 fee that would otherwise be charged to the Authorized Participant in connection with an order to create or redeem was waived in connection with the initial Creation Basket. USCF agreed not to resell the shares comprising such basket except that it may require the initial Authorized Participant to repurchase all of these shares at a per share price equal to USCI’s per share NAV within five days following written notice from USCF, subject to the conditions that: (i) on the date of repurchase, the initial Authorized Participant must immediately redeem these shares in accordance with the terms of the Authorized Participant Agreement and (ii) immediately following such redemption at least 100,000 shares of USCI remain outstanding. USCF held such initial Creation Basket until September 3, 2010, at which time the initial Authorized Participant repurchased the shares comprising such basket in accordance with the specified conditions noted above. On September 14, 2011, USCF redeemed the 20 Sponsor Shares of USCI, and on September 19, 2011, USCF purchased five shares of USCI in the open market.
Since its initial offering of 50,000,000 shares, USCI has registered 10,000,000 additional shares as of December 31, 2022. As of December 31, 2022, USCI had issued 41,150,000 shares, 4,550,000 of which were outstanding. As of December 31, 2022, there were 18,850,000 shares registered but not yet issued. More shares may have been issued by USCI than are outstanding due to the redemption of shares.
Since its initial offering of 30,000,000 shares, CPER has registered 50,000,000 additional shares as of December 31, 2022. As of December 31, 2022, CPER had issued 23,900,000 shares, 7,350,000 of which were outstanding. As of December 31, 2022, there were 56,100,000 shares registered but not yet issued. More shares may have been issued by CPER than are outstanding due to the redemption of shares.
USCF and the Trustee entered into the Fourth Amended and Restated Declaration of Trust and Trust Agreement effective as of December 15, 2017.
Unlike funds that are registered under the 1940 Act, shares that have been redeemed by the Trust Series cannot be resold. As a result, each Trust Series contemplates that additional offerings of its shares will be registered with the SEC in the future in anticipation of additional issuances and redemptions.
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As of December 31, 2022, USCI and CPER had the following Authorized Participants: BNP Paribas Securities Corp., Citadel Securities LLC, Credit Suisse Securities (USA) LLC, Goldman Sachs & Company, Jefferies LLC., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., RBC Capital Markets LLC and Virtu Americas LLC.
For the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
USCI
Year ended
Year ended
December 31,
December 31,
2022
2021
Per share net asset value, end of year
$
56.23
$
43.43
Average daily total net assets
$
304,583,861
$
210,130,456
Dividend and interest income earned on Treasuries, cash and/or cash equivalents
$
4,484,233
$
49,734
Annualized yield based on average daily total net assets
1.47
%
0.02
%
Management fee
$
2,436,671
$
1,681,043
Total fees and other expenses excluding management fees
$
840,252
$
442,073
Fees and expenses related the registration or offering of additional shares
$
6,617
$
32,976
Total commissions accrued to brokers
$
208,672
$
151,236
Total commissions as annualized percentage of average total net assets
0.07
%
0.07
%
Commissions accrued as a result of rebalancing
$
195,577
$
140,854
Percentage of commissions accrued as a result of rebalancing
93.72
%
93.14
%
Commissions accrued as a result of creation and redemption activity
$
13,095
$
10,382
Percentage of commissions accrued as a result of creation and redemption activity
6.28
%
6.86
%
Portfolio Expenses. USCI’s expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, registration fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee that USCI pays to USCF is calculated as a percentage of the total net assets of USCI. The fee is accrued daily and paid monthly.
The increase in the per share NAV for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due to increase in values of the Futures Contracts held by USCI.
Average interest rates earned on short-term investments held by USCI, including cash, cash equivalents and Treasuries, were higher during the year ended December 31, 2022, compared to the year ended December 31, 2021. As a result, the amount of income earned by USCI as a percentage of average daily total net assets was higher during the year ended December 31, 2022, compared to the year ended December 31, 2021. To the degree that the aggregate yield is higher, the net expense ratio, inclusive of income, will be lower.
The increase in total fees and other expenses excluding management fees for the year ended December 31, 2022, compared to the year ended December 31, 2021 was due primarily to an increase in total commissions accrued to brokers and prepaid registration of additional shares.
The increase in USCI’s total commissions accrued to brokers for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due primarily to a higher number of Futures Contracts being held and traded.
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CPER
Year ended
Year ended
December 31,
December 31,
2022
2021
Per share net asset value, end of year
$
23.07
$
27.24
Average daily total net assets
$
192,081,124
$
240,791,964
Dividend and interest income earned on Treasuries, cash and/or cash equivalents
$
2,559,897
$
58,293
Annualized yield based on average daily total net assets
1.33
%
0.02
%
Management fee
$
1,248,527
$
1,565,147
Total fees and other expenses excluding management fees
$
604,545
$
544,915
Total amount of the expense waiver
$
—
$
63,274
Expenses before the allowance of the expense waiver
$
1,853,072
$
2,110,062
Expenses after the allowance of the expense waiver
$
1,853,072
$
2,046,788
Fees and expenses related the registration or offering of additional shares
$
24,092
$
117,738
Total commissions accrued to brokers
$
55,612
$
65,088
Total commissions as annualized percentage of average total net assets
0.03
%
0.03
%
Commissions accrued as a result of rebalancing
$
48,186
$
52,546
Percentage of commissions accrued as a result of rebalancing
86.65
%
80.73
%
Commissions accrued as a result of creation and redemption activity
$
7,426
$
12,542
Percentage of commissions accrued as a result of creation and redemption activity
13.35
%
19.27
%
Portfolio Expenses. CPER’s expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, registration fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee that CPER pays to USCF is calculated as a percentage of the total net assets of CPER. The fee is accrued daily and paid monthly.
The decrease in the per share NAV for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due to an increase/decrease in the values of the Futures Contracts held by CPER.
Average interest rates earned on short-term investments held by CPER, including cash, cash equivalents and Treasuries, were higher during the year ended December 31, 2022, compared to the year ended December 31, 2021. As a result, the amount of income earned by CPER as a percentage of average daily total net assets was higher during the year ended December 31, 2022. To the degree that the aggregate yield is higher, the net expense ratio, inclusive of income, will be lower.
The increase in total fees and other expenses excluding management fees for the year ended December 31, 2022, compared to the year ended December 31, 2021 was due primarily to an increase in professional fees.
The decrease in CPER’s total commissions accrued to brokers for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due primarily to a lower number of Futures Contracts being held and traded.
Portfolio Holdings for USCI
During the year ended December 31, 2022, USCI’s portfolio held at all times Futures Contracts based on at least fourteen different commodities. Due to changes in the composition of the SDCI, each month the list of Benchmark Component Futures Contracts held by USCI changed (see the section “The SDCI” below). The table below lists the Benchmark Component Futures Contracts held during each month in 2022.
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Benchmark Component Futures Contracts for USCI
Commodity
1/1/2022
2/1/2022
3/1/2022
4/1/2022
5/1/2022
6/1/2022
7/1/2022
8/1/2022
9/1/2022
10/1/2022
11/1/2022
12/1/2022
Aluminum
·
Cocoa
·
Coffee
·
·
·
·
·
Copper
·
·
·
Corn
·
·
·
·
·
·
Cotton
·
·
·
·
·
·
·
·
·
·
·
·
Crude Oil (Brent)
·
·
·
·
·
·
·
·
·
·
·
·
Crude Oil (WTI)
·
·
·
·
·
·
·
·
·
·
·
Feeder Cattle
Gas Oil
·
·
·
·
·
·
·
·
·
·
·
·
Gold
·
Heating Oil
·
·
·
·
·
·
·
·
·
·
·
·
Lead
·
·
·
Lean Hogs
·
·
·
·
Live Cattle
·
·
Natural Gas
·
·
·
·
Nickel
·
·
·
Platinum
·
·
·
·
·
·
·
·
·
Silver
·
·
·
·
·
Soybean Meal
·
·
·
·
·
·
·
·
·
·
·
Soybean Oil
·
·
·
·
·
·
·
·
·
Soybeans
·
·
·
·
·
·
Sugar
·
·
·
·
·
·
·
Tin
·
·
·
·
·
·
·
·
Unleaded Gasoline
·
·
·
·
·
·
·
·
·
·
Wheat
·
Zinc
·
·
·
·
·
·
·
·
·
·
• = Component
Source: Bloomberg
The table below reflects the same listing of monthly Benchmark Component Futures Contracts as the tables above with two changes. First, the table below includes a column showing the change in the spot price of each of the 27 commodities for the year ended December 31, 2022. Second, while the tables above list the order of the commodities alphabetically, the table below lists the commodities first by which of the five sectors a commodity falls into and then within each sector from the commodity that had the highest positive change in spot price to the commodity that had the lowest positive change or largest negative change in spot price. 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.
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Benchmark Component Futures Contracts for USCI
YTD Spot
Price
Commodity
1/1/2022
2/1/2022
3/1/2022
4/1/2022
5/1/2022
6/1/2022
7/1/2022
8/1/2022
9/1/2022
10/1/2022
11/1/2022
12/1/2022
Performance
Soybean Oil
·
·
·
·
·
·
·
·
·
16.2
%
Soybean Meal
·
·
·
·
·
·
·
·
·
·
·
14.4
%
Wheat
·
14.3
%
Corn
·
·
·
·
·
·
13.3
%
Soybeans
·
·
·
·
·
·
2.8
%
Aluminum
·
43.2
%
Zinc
·
·
·
·
·
·
·
·
·
·
·
(0.2)
%
Tin
·
·
·
·
·
·
·
·
(14.6)
%
Copper
·
·
·
(16.2)
%
Lead
·
·
·
(16.5)
%
Nickel
·
·
·
(37.0)
%
Live Cattle
·
·
20.0
%
Sugar
·
·
·
·
·
·
·
11.5
%
Coffee
·
·
·
·
·
10.1
%
Cotton
·
·
·
·
·
·
·
·
·
·
·
·
7.6
%
Cocoa
·
6.1
%
Feeder Cattle
3.2
%
Natural Gas
·
·
·
·
(26.0)
%
Lean Hogs
·
·
·
·
(26.0)
%
Gas Oil
·
·
·
·
·
·
·
·
·
·
·
·
44.3
%
Heating Oil
·
·
·
·
·
·
·
·
·
·
·
·
38.1
%
Crude Oil (WTI)
·
·
·
·
·
·
·
·
·
·
·
10.5
%
Unleaded Gasoline
·
·
·
·
·
·
·
·
·
·
10.4
%
Crude Oil (Brent)
·
·
·
·
·
·
·
·
·
·
·
·
6.7
%
Platinum
·
·
·
·
·
·
·
·
·
11.3
%
Silver
·
·
·
·
·
2.9
%
Gold
·
(0.1)
%
• = Component
Source: Bloomberg
Tracking Each Trust Series’ Benchmark
USCF seeks to manage each Trust Series’ portfolio such that changes in its average daily per share NAV, on a percentage basis, closely track the daily changes in the average 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 share 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 daytime period was 0.50% per day, USCF would attempt to manage the portfolio such that the average daily movement of the per share 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 share 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 and Other-Related Investments.
USCI
For the 30-valuation days ended December 31, 2022, the simple average daily change in the SDCI was 0.023%, while the simple average daily change in the per share NAV of USCI over the same time period was 0.019%. 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 SDCI, the average error in daily tracking by the per share NAV was (7.234)%, meaning that over this time period USCI’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
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Since the commencement of the offering of USCI’s shares to the public on August 10, 2010 through December 31, 2022, the simple average daily change in the SDCI was 0.013%, while the simple average daily change in the per share NAV of USCI over the same time period was 0.008%. 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 SDCI, the average error in daily tracking by the per share NAV was (6.806)%, 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 following two charts demonstrate the correlation between the changes in SDCI’s NAV and the changes in the SDCI. The first chart below shows the daily movement of USCI’s per share NAV versus the daily movement of the SDCI for the 30-valuation day period ended December 31, 2022, the last trading day in December. The second chart below shows the monthly total returns of USCI as compared to the monthly value of the SDCI for the five years ended December 31, 2022.
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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 USCI versus the return of its SDCI can be calculated by comparing the actual return of USCI, measured by changes in its per share NAV, versus the expected changes in its per share NAV under the assumption that USCI’s returns had been exactly the same as the daily changes in its SDCI.
For the year ended December 31, 2022, the actual total return of USCI as measured by changes in its per share NAV was 29.47%. This is based on an initial per share NAV of $43.43 as of December 31, 2021 and an ending per share NAV as of December 31, 2022 of $56.23. During this time period, USCI made no distributions to its shareholders. However, if USCI’s daily changes in its per share NAV
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had instead exactly tracked the changes in the daily total return of the SDCI, USCI would have had an estimated per share NAV of $57.17 as of December 31, 2022, for a total return over the relevant time period of 31.64%. The difference between the actual per share NAV total return of USCI of 29.47% and the expected total return based on the SDCI of 31.64% was a difference over the time period of (2.17)%, which is to say that USCI’s actual total return underperformed its benchmark by that percentage. USCI incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution, tends to cause daily changes in the per share NAV of USCI to track slightly lower or higher than daily changes in the price of the SDCI.
By comparison, for the year ended December 31, 2021, the actual total return of USCI as measured by changes in its per share NAV was 33.30%. This is based on an initial per share NAV of $32.58 as of December 31, 2020 and an ending per share NAV as of December 31, 2021 of $43.43. During this time period, USCI made no distributions to its shareholders. However, if USCI’s daily changes in its per share NAV had instead exactly tracked the changes in the daily total return of the SDCI, USCI would have had an estimated per share NAV of $43.92 as of December 31, 2021, for a total return over the relevant time period of 34.81%. The difference between the actual per share NAV total return of USCI of 33.30% and the expected total return based on the SDCI of 34.81% was a difference over the time period of (1.51)%, which is to say that USCI’s actual total return underperformed its benchmark by that percentage. USCI incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution, tends to cause daily changes in the per share NAV of USCI to track slightly lower or higher than daily changes in the price of the SDCI.
CPER
For the 30-valuation days ended December 31, 2022, the simple average daily change in the SCI was 0.052%, while the simple average daily change in the per share NAV of CPER over the same time period was 0.050%. 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 SCI, the average error in daily tracking by the per share NAV was (4.730)%, meaning that over this time period CPER’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
Since the commencement of the offering of CPER’s shares to the public on November 15, 2011 through December 31, 2022, the simple average daily change in the SCI was 0.010%, while the simple average daily change in the per share NAV of CPER over the same time period was 0.006%. 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 SCI, the average error in daily tracking by the per share NAV was (3.020)%, 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 following two charts demonstrate the correlation between the changes in CPER’s NAV and the changes in the SCI. The first chart below shows the daily movement of CPER’s per share NAV versus the daily movement of the SCI for the 30-valuation day period ended December 31, 2022, the last trading day in September. The second chart below shows the monthly total returns of CPER as compared to the monthly value of the SCI for the five years ended December 31, 2022.
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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 CPER versus the return of its SCI can be calculated by comparing the actual return of CPER, measured by changes in its per share NAV, versus the expected changes in its per share NAV under the assumption that CPER’s returns had been exactly the same as the daily changes in its SCI.
For the year ended December 31, 2022, the actual total return of CPER as measured by changes in its per share NAV was (15.31)%. This is based on an initial per share NAV of $27.24 as of December 31, 2020 and an ending per share NAV as of December 31, 2022 of $23.07. During this time period, CPER made no distributions to its shareholders. However, if CPER’s daily changes in its per share
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NAV had instead exactly tracked the changes in the daily total return of the SCI, CPER would have had an estimated per share NAV of $23.42 as of December 31, 2022, for a total return over the relevant time period of (14.02)%. The difference between the actual per share NAV total return of CPER of (15.31)% and the expected total return based on the SCI of (14.02)% was an error over the time period of (1.29)%, which is to say that CPER’s actual total return underperformed its benchmark by that percentage. CPER incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution, tends to cause daily changes in the per share NAV of CPER to track slightly lower or higher than daily changes in the price of the SCI.
By comparison, for the year ended December 31, 2021, the actual total return of CPER as measured by changes in its per share NAV was 25.41%. This is based on an initial per share NAV of $21.72 as of December 31, 2020 and an ending per share NAV as of December 31, 2021 of $27.24. During this time period, CPER made no distributions to its shareholders. However, if CPER’s daily changes in its per share NAV had instead exactly tracked the changes in the daily total return of the SCI, CPER would have had an estimated per share NAV of $27.48 as of December 31, 2021, for a total return over the relevant time period of 26.52%. The difference between the actual per share NAV total return of CPER of 25.41% and the expected total return based on the SCI of 26.52% was an error over the time period of (1.11)%, which is to say that CPER’s actual total return underperformed its benchmark by that percentage. CPER incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution, tends to cause daily changes in the per share NAV of CPER to track slightly lower or higher than daily changes in the price of the SCI.
Factors That Can Impact Ability to Track the Applicable Index
There are currently five factors that have impacted or are most likely to impact a Trust Series’ ability to accurately track its 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 share 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. USCF attempts 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.
Second, each Trust Series incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses tends to cause daily changes in the per share NAV of such Trust Series to track slightly lower than daily changes in the price of the Applicable Index. At the same time, each Trust Series earns dividend and interest income on its cash, cash equivalents and Treasuries. A Trust Series is not required to distribute any portion of its income to its shareholders and did not make any distributions to shareholders during the year ended December 31, 2022. Interest payments, and any other income, were retained within the portfolio and added to each Trust Series’ NAV. When this income exceeds the level of a Trust Series’ expenses for its management fee, brokerage commissions and other expenses (including ongoing registration fees, licensing fees and the fees and expenses of the independent directors of USCF), such Trust Series realizes a net yield that will tend to cause daily changes in the per share NAV of such Trust Series to track slightly higher than daily changes in the price of the Applicable Index. If short-term interest rates rise above these levels, the level of deviation created by the yield would increase. Conversely, if short-term interest rates were to decline, the amount of error created by the yield would decrease. 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 share NAV to underperform the daily returns of the Applicable Index. USCF anticipates that interest rates may continue to increase over the near future from historical lows. It is anticipated that fees and expenses paid by each Trust Series may continue to be higher than interest earned by each Trust Series. As such, USCF anticipates that each Trust Series could possibly outperform its benchmark so long as interest earned is higher than the fees and expenses paid by each Trust Series.
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 2020. 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 2020. Alternatively, and using the same example, USCI could hold the ICE WTI financially settled Futures Contract, also for the contract month of November 2020. As a third example, USCI could hold the NYMEX WTI physically settled
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Futures Contract, trading under the symbol “CL,” but for a contract month other than November 2020. During the year ended December 31, 2022, no Trust Series held any Other Related Investments.
Fourth, a Trust Series could hold Other-Related Investments. In that case, the error in tracking the Applicable Index could result in daily changes in the per share 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 year ended December 31, 2022, 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.
Finally, a Trust Series could hold the same Futures contracts as its benchmark but at a different weight. This is due to the fact that the benchmark can theoretically own a fractional percentage of a Futures contract but a Trust Series must own a full contract. For a Trust Series with smaller asset base, this percentage difference can have a material impact.
Hypothetical Performance of the SDCI
The table and chart below show the hypothetical performance of the SDCI from January 1, 2012 through December 31, 2022.
The composition of the SDCI was revised effective December 24, 2020. Beginning with the commodity selection process that commenced on December 24, 2020, SHIM revised the composition of the SDCI to consolidate the six commodity sectors that comprised the index into five sectors. Specifically, prior to December 24, 2020, the SDCI reflected commodities in six commodity sectors: energy (e.g., crude oil, natural gas, 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). In light of these changes to the SDCI, the table and chart below reflecting the performance of the SDCI from January 1, 2020 through December 31, 2021 also reflects the hypothetical performance of the SDCI from January 1, 2020 through December 24, 2020 had the changes to the composition of the SDCI been effective during that period.
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.
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 SDCI. Such fees and expenses would reduce the performance returns shown in the table below.
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* PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Hypothetical Performance Results* for the period from January 1, 2012 through December 31, 2022
Year
Ending Level*
Annual Return
2012
1,726.55
1.37
%
2013
1,678.73
(2.77)
%
2014
1,475.68
(12.10)
%
2015
1,265.58
(14.24)
%
2016
1,262.46
(0.25)
%
2017
1,364.38
8.07
%
2018
1,221.18
(10.50)
%
2019
1,219.05
(0.17)
%
2020
1,089.40
(10.64)
%
2021
1,468.49
34.80
%
2022
1,933.23
31.65
%
* The “base level” for the SDCI was set at 100 on January 2, 1991. The “Ending Level” represents the value of the components of the SDCI on the last trading day of each year and is used to illustrate the cumulative performance of the SDCI. In addition to the actual performance of the SDCI, this chart includes the hypothetical performance of the SDCI had the changes to the composition of the SDCI, which became effective on December 24, 2020, been effective during the January 1, 2012 through December 31, 2022 period.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
SummerHaven Dynamic Commodity Index Total Return SM (“SDCI”) Year-Over-Year Hypothetical Total Returns (1/1/2012–12/31/2022)* YTD)
Source: SummerHaven Index Management, Bloomberg
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* In addition to the actual performance of the SDCI, this chart includes as “SDCI Hypothetical TR” the hypothetical performance of the SDCI had the changes to the composition of the SDCI, which became effective on December 24, 2020, been effective during the January 1, 2012 through December 24, 2020 period.
The following table and chart compare the hypothetical total return of the SDCI in comparison with the actual total return of three major indexes for the period from December 31, 1997 to December 31, 2022.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Hypothetical and Historical Results for the period
from December 31, 1997 through December 31, 2022
S&P GSCI
DB LCI OY
SDCI TR
BCOM TR
TR
TR
Actual
Total return
59.07
%
14.27
%
339.40
%
759.13
%
Average annualized return (total)
3.71
%
4.30
%
8.64
%
10.93
%
Annualized volatility
16.16
%
23.30
%
18.96
%
15.49
%
Annualized Sharpe ratio
0.11
0.10
0.35
0.57
The table immediately above shows the performance of the SDCI from December 31, 1997 through December 31, 2022 in comparison with three traditional commodities indices: the S&P GSCI Commodity Index (GSCI®) Total Return, Bloomberg Commodity Index Total Return SM (“BCOM TR”), and the Deutsche Bank Liquid Commodity Index-Optimum Yield Total Return TM (“DB LCI OYTR”). 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 Bloomberg Commodity Index Total Return SM 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, 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 SDCI’s calculation methodology with historical prices for the futures contracts comprising the SDCI. 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 SDCI. As a result, there are inherent limitations in comparing the performance of such indices against the SDCI. 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 annual report on Form 10-K.
In the table above, “Total Return” refers to the return of the relevant index from December 31, 1997 to December 31, 2022; “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.
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The following chart compares the hypothetical total return of the SDCI in comparison with the actual total return of three major indexes between December 31, 2012 and December 31, 2022.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Ten Year Comparison of Index Returns of the BCOM TR,
S&P GSCI TR, DB LCI OY TR, and the Hypothetical Returns of the SDCI TR (12/31/2012– 12/31/2022)*
Source: SHIM, Bloomberg
* In addition to the actual performance of the SDCI, this chart includes as “SDCI Hypothetical TR” the hypothetical performance of the SDCI had the changes to the composition of the SDCI, which became effective on December 24, 2020, been effective during the December 31, 2012 through December 31, 2022.
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The following chart compares the hypothetical total return of the SDCI in comparison with the actual total return of three major indexes over a five year period.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Five Year Comparison of Index Returns of the BCOM TR,
S&P GSCI TR, DB LCI OY TR, and the Hypothetical Returns of the SDCI TR (12/31/2017– 12/31/2022)*
Source: SHIM, Bloomberg
* In addition to the actual performance of the SDCI, this chart includes as “SDCI Hypothetical TR” the hypothetical performance of the SDCI had the changes to the composition of the SDCI, which became effective on December 24, 2020, been effective during the December 31, 2017 through December 31, 2022 period.
SCI
The SCI is a single-commodity index designed to be an investment benchmark for copper as an asset class. The SCI is composed of copper futures contracts on the COMEX exchange. The SCI attempts to maximize backwardation and minimize contango while utilizing contracts in liquid portions of the futures curve.
The SCI 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 SCI in any given month will be determined by quantitative formulas relating to the prices of the futures contracts that are included in the SCI. Such formulas are not subject to adjustment based on other factors.
The overall return on the SCI is generated by two components: (i) uncollateralized returns from the Benchmark Component Copper Futures Contracts comprising the SCI, 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. SHIM is the owner of the SCI.
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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
TABLE 2
Commodity
Allowed
Max.
Commodity Name
Symbol
Contracts
Tenor
Copper
HG
All 12 calendar months
12
Prior to the end of each month, SHIM determines the composition of the SCI and provides such information to the NYSE Arca. Values of the SCI 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 SCI value at approximately 5:30 p.m., New York City time, under the index ticker symbol “SCI.” Only settlement and last-sale prices are used in the SCI’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 SCI may lag its theoretical value. This tendency to lag is evident at the end of the day when the SCI value is based on the settlement prices of the Benchmark Component Copper Futures Contracts, and explains why the underlying SCI often closes at or near the high or low for the day.
Composition of the SCI
The composition of the SCI on any given day, as determined and published by SHIM, is determinative of the benchmark for CPER. Neither the index methodology for the SCI nor any set of procedures, however, are capable of anticipating all possible circumstances and events that may occur with respect to the SCI 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 SCI that cannot be adequately reflected in this description of the SCI. All questions of interpretation with respect to the application of the provisions of the index methodology for the SCI, including any determinations that need to be made in the event of a market emergency or other extraordinary circumstances, will be resolved by SHIM.
Beginning with the commodity selection process that was scheduled to occur on December 31, 2020, the rebalancing period for the SCI changed from the first four business days of each month to the 11th-14th business days of each month, based on signals used for contract selection on the 10th business day of each month, rather than the last business day of each month. In addition, commencing with the first commodity selection date occurring after the change, the SCI was revised as follows: the number of Eligible Copper Futures Contracts was reduced, and the SCI itself is now comprised of one or three Eligible Copper Futures Contracts. Previously, the SCI could have been comprised of two or three Eligible Copper Futures Contracts. These revisions to the composition of the SCI are intended to ensure that the SCI components at any given time represent copper futures contracts for which there is an active and liquid trading market.
Contract Expirations
Because the SCI 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 SCI for each commodity during a given year are designated by SHIM, 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, SHIM may designate a replacement contract. The replacement contract must satisfy the eligibility criteria for inclusion in the SCI. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the SCI. If that timing is not practicable, SHIM 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.
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The designation of a replacement contract could affect the value of the SCI, 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 SCI.
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 SCI 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 CPER’s Selection Date (“CPER’s Selection Date”):
a) the copper futures curve is assessed to be in either backwardation or contango (as discussed below); and
b)
the Three Eligible Copper Futures Contracts are identified. For each month, the Three Eligible Copper Futures Contracts are as follows
Month
January
February
March
April
May
June
July
August
September
October
November
December
Closest to Expiration Futures Contract
Mar
Mar
May
May
Jul
Jul
Sep
Sep
Dec
Dec
Dec
Mar
Eligible Futures Contracts
Mar
May
May
Jul
Jul
Sep
Sep
Dec
Dec
Dec
Mar
Mar
May
July
July
Sep
Sep
Dec
Dec
Mar
Mar
Mar
May
May
July
Sep
Sep
Dec
Dec
Mar
Mar
May
May
May
Jul
Jul
A futures curve in backwardation occurs when the price of the closest-to-expiration Eligible Copper Futures Contract is greater than or equal to the price of the next closest-to-expiration Eligible Copper Futures Contract. These contracts will have expirations that are approximately two or three 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 next closest-to-expiration contract.
2a) Backwardation: If the copper futures curve is in backwardation on the Selection Date, the SCI takes positions in the first Eligible Copper Futures Contract, weighted at 100%.
A hypothetical example is included below, with the selected Eligible Copper Futures Contract shaded below:
Expiration
Contract
Copper Futures Contract
Date
Price
Nearest-to-maturity
December-10
374.70
Next nearest-to-maturity
March-11
365.20
Eligible Copper Futures Contracts
Price
December-10
374.70
2b) Contango: If the copper futures curve is in contango, then the SCI takes positions in first three Eligible Copper Futures Contracts, each position is weighted at 33.33%.
A hypothetical example is included below, with the three selected Eligible Copper Futures Contracts indicated below:
Copper Futures Contract
Expiration Date
Contract Price
Nearest-to-maturity
December-10
374.00
Next nearest-to-maturity
March-11
375.70
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Eligible Copper Futures Contracts
Price
December-10
374.00
March-11
375.70
May-11
376.30
Due to the dynamic monthly weighting calculation, the individual weights will vary-over time, depending on the price observations each month. CPER’s Selection Date for the SCI is the 10th business day of the calendar month.
The following graph shows the weights of the Benchmark Component Copper Futures Contracts selected for inclusion in the SCI as of December 31, 2022.
Insert SCI Chart – Contracts Weights
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 CPER’s Selection Date.
SCI Total Return Calculation
The value of the SCI on any business day is equal to the product of (i) the value of the SCI on the immediately preceding business day multiplied by (ii) one plus the sum of the day’s returns for another version of the SCI 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 SCI will be calculated and published by the NYSE Arca.
SCI Base Level
The SCI 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 SCI 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”.
Rebalancing Period
The SCI is rebalanced during the 11th-14th business days of each month, based on signals used for contract selection on the 10th business day of each month, when existing positions are placed by new positions and weightings based on the signals used for contract selection on the prior calendar month as outlined above.
Hypothetical Performance of the SCI
The table and chart below show the hypothetical performance of the SCI from January 1, 2012 through December 31, 2022.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT CPER 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.
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 SCI. Such fees and expenses would reduce the performance returns shown in the table below.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Hypothetical Performance Results* for the SCI for the period from January 1, 2012 through December 31, 2022
Year
Ending Level*
Annual Return
2012
1,223.15
5.04
%
2013
1,114.30
(8.90)
%
2014
937.33
(15.88)
%
2015
704.39
(24.85)
%
2016
815.94
15.84
%
2017
1,069.01
31.02
%
2018
842.94
(21.15)
%
2019
905.32
7.40
%
2020
1,124.23
24.18
%
2021
1,422.52
26.53
%
2022
1,222.97
(14.03)
%
* The “base level” for the SCI was set at 100 on January 2, 1991. The “Ending Level” represents the value of the components of the SCI on the last trading day of each year and is used to illustrate the cumulative performance of the SCI.
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*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
SummerHaven Copper Index (“SCI”) Year-Over-Year Hypothetical Total Returns (1/1/2012– 12/31/2022 YTD)
Source: SummerHaven Index Management, Bloomberg
The following table compares the hypothetical total return of the SCI in comparison with the actual total return a major index and spot copper prices (less storage cost) from December 31, 1997 through December 31, 2022.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Hypothetical and Historical Results for the period from December 31, 1997 through December 31, 2022
Hypothetical and Historical Results for the period
from December 31, 1997 through December 31, 2022
BCOM
Spot Copper
SCI TR
Copper TR
(less storage)
Actual
Total return
420.20
%
136.85
%
680.95
%
Average annualized return (total)
12.33
%
8.69
%
14.48
%
Annualized volatility
25.59
%
24.76
%
25.09
%
Annualized Sharpe ratio
0.40
0.27
0.50
Source: SHIM, Bloomberg
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The table above shows the performance of the SCI from December 31, 1997 through December 31, 2022 in comparison with a traditional commodity index and spot copper prices: the Bloomberg Copper Subindex Total Return SM and spot copper prices less warehouse storage rents. The Bloomberg Copper Subindex Total Return SM includes the contract in the Bloomberg 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 SCI’s calculation methodology with historical prices for the futures contracts comprising the SCI. 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 SCI. As a result, there are inherent limitations in comparing such performance against the SCI. For more information about the index and its methodologies, please refer to the material published by the sponsor of the Bloomberg Copper Subindex Total Return which may be found on its website. In addition to the actual performance of the SCI, this chart includes as “SCI Hypothetical TR” the hypothetical performance of the SCI had the changes to the composition of the SCI, which became effective on January 1, 2021, been effective during the period from December 31, 1997 through December 31, 2020. USCF is not responsible for any information found on such website, and such information is not part of this annual report on Form 10-K.
In the table above, “Total Return” refers to the return of the relevant index from December 31, 1997 to December 31, 2022; “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.
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The following chart compares the hypothetical total return of the SCI in comparison with the actual return of three major indexes between December 31, 2012 and December 31, 2022.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Ten Year Comparison of Index Returns of
BCOM HG TR, Spot Copper Price, Spot Copper Price less Storage Cost, and the Hypothetical Returns of the SCI TR (12/31/2012– 12/31/2022)*
Source: SHIM, Bloomberg, LME
* In addition to the actual performance of the SCI, this chart includes as “SCI Hypothetical TR” the hypothetical performance of the SCI had the changes to the composition of the SCI, which are described above and became effective on January 1, 2021, been effective during the December 31, 2012 through December 31, 2022 period.
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The following chart compares the hypothetical total return of the SCI in comparison with the actual total return of two major indices and spot copper prices (less storage cost) over a five year period.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Five Year Comparison of Index Returns of
BCOM HG TR, Spot Copper Price, Spot Copper Price less Storage Cost, and the Hypothetical Returns of the SCI (12/31/2017- 12/31/2022)
Source: SHIM, Bloomberg, LME
*In addition to the actual performance of the SCI, this chart includes as “SCI Hypothetical TR” the hypothetical performance of the SCI had the changes to the composition of the SCI, which are described above and became effective on January 1, 2021, been effective during the December 31, 2017 through December 31, 2022 period.
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The comparison of the fiscal years ended December 31, 2021 and 2020 can be found in the Trust’s annual report on Form 10-K for the fiscal year ended December 31, 2021 located within Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
Critical Accounting Policies
Preparation of the 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.
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USCF has evaluated the nature and types of estimates that it makes in preparing the Trust’s 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 forward contracts and OTC swaps) 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 OTC swaps 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.
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 shares, providing margin deposits for its existing Futures Contracts or the purchase of additional Futures Contracts and posting collateral for its OTC swaps, if applicable, and payment of its expenses, summarized below under “Contractual Obligations.”
Each Trust Series currently generates cash primarily from: (i) the sale of 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 Treasuries, 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 the Custodian and in Treasuries at one or more FCMs. Income received from any investments in money market funds and Treasuries by a Trust Series will be paid to such Trust Series. During the year ended December 31, 2022, each Trust Series’ income earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets exceeded the expenses.
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 contracts 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 year ended December 31, 2022, 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 shares, 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 shares 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 shares 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.
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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.
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. The Trust Series are not currently a member of any clearinghouse. Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of banks or other financial institutions. 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 OTC 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. 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. FCMs are not allowed to commingle a Trust Series’ assets with their other assets. In addition, the CFTC requires FCMs to hold in a secure account a Trust Series’ assets related to foreign Futures Contracts trading. During the year ended December 31, 2022, CPER did not make investments on any foreign exchanges. In the future, a Trust Series may purchase OTC swaps, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in this annual report on Form 10-K for a discussion of OTC swaps.
As of December 31, 2022, each of USCI and CPER held cash deposits and investments in Treasuries and money market funds in the amount of $246,057,371 and $165,213,916, respectively, with the custodian and FCMs. Some or all of these amounts held by a custodian or an FCM, as applicable, may be subject to loss should the Trust Series’ custodian or FCMs, as applicable, cease operations.
Off Balance Sheet Financing
As of December 31, 2022, neither the Trust nor any Trust Series had any loan guarantee, credit support or other off-balance sheet arrangements 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.
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Redemption Basket Obligation
In order to meet its investment objective and pay its contractual obligations described below, each Trust Series requires liquidity to redeem shares, which redemptions must be in blocks of 50,000 shares called “Redemption Baskets.” 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 shares being redeemed.
Contractual Obligations
The Trust’s (and each series thereunder) primary contractual obligations are with USCF and certain other service providers. In return for its services, USCF is entitled to a management fee calculated as a fixed percentage of a Trust Series’ NAV. Effective January 1, 2016, USCF permanently lowered the management fee to 0.80% (80 basis points) per annum of average daily total net assets for USCI and 0.65% (65 basis points) per annum of average daily total net assets for CPER. 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 shares of each Trust Series or offering shares of each Trust Series after the time any shares 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 shareholders 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;
● postage and insurance, including directors’ and officers’ liability insurance;
● costs and expenses associated with investor relations and services;
● the payment of any distributions related to redemption of shares;
● 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; 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 shares 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 shares after the initial offering of shares. In addition, any Trust Series, in its Registration Statement, may provide for different allocation of expenses among the Sponsor and such Trust Series, in each case solely with respect to such Trust Series.
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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 year ended December 31, 2022, FCM fees were approximately 0.07% of average daily total net assets for USCI, and approximately 0.03% of average daily total net assets for CPER. In general, transaction costs on OTC 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 June 30, 2011 when such expense waiver was terminated. USCF voluntarily agreed to pay certain expenses typically borne by CPER to the extent that such expenses exceed 0.15% (15 basis points) of CPER’s NAV, on an annualized basis. USCF terminated such expense waiver as of April 30, 2021. As a result, the Annual Fund Operating Expenses increased, which would negatively impact your total return from an investment in CPER. This voluntary expense waiver was in addition to those amounts USCF is contractually obligated to pay as described in Note 5 to the financial statements of the Trust and terminated on April 30, 2021.
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 December 31, 2022, USCI’s portfolio consisted of 6,037 Futures Contracts traded on the Futures Exchanges and CPER’s portfolio consisted of 1,779 Contracts traded on the COMEX. For a list of each of USCI’s and CPER’s current holdings, please see www.uscfinvestments.com.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.