Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
This information should be read in conjunction
with the financial statements and notes included in Item 1 of Part I of this Quarterly Report (the “Report”). The discussion
and analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 which reflect our current views with respect to future events and financial results. Words such as “anticipate,”
“expect,” “intend,” “plan,” “believe,” “seek,” “outlook” and “estimate,”
as well as similar words and phrases, signify forward-looking statements. ETF Managers Group Commodity Trust I’s forward-looking
statements are not guarantees of future results and conditions, and important factors, risks and uncertainties may cause our actual results
to differ materially from those expressed in our forward-looking statements.
You should not place undue reliance on any
forward-looking statement. Except as expressly required by the Federal securities laws, ETF Managers Capital, LLC undertakes no obligation
to publicly update or revise any forward-looking statement or the risks, uncertainties or other factors described in this Report, as a
result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Overview
The Trust is a Delaware statutory trust formed
on July 23, 2014. The Trust is a series trust formed pursuant to the Delaware Statutory Trust Act and currently includes one series:
Breakwave Dry Bulk Shipping ETF (“BDRY,” or the “Fund”), which is a commodity pool that continuously issues shares
of beneficial interest that may be purchased and sold on the NYSE Arca. The Trust also includes one additional series, the Breakwave Tanker Shipping ETF, which may be publicly offered in the future.
The Fund is managed and controlled by ETF Managers
Capital LLC (the “Sponsor”), a single member limited liability company that was formed in the state of Delaware on June 12,
2014. The Fund pays the Sponsor a management fee. The Sponsor, the Trust, and the Fund maintain their main business offices at 30 Maple
Street, Suite 2, Summit, NJ 07901. The Sponsor’s telephone number is (908) 897-0518.
The Sponsor is a wholly-owned subsidiary of Exchange
Traded Managers Group LLC (“ETFMG”), a limited liability company domiciled and headquartered in New Jersey.
The Sponsor has the power and authority to establish
and designate one or more series and to issue shares thereof, from time to time as it deems necessary or desirable. The Sponsor has exclusive
power to fix and determine the relative rights and preferences as between the shares of any series as to the right of redemption, special
and relative rights as to dividends and other distributions and on liquidation, conversion rights, and conditions under which the series
shall have separate voting rights or no voting rights. The term for which the Trust is to exist commenced on the date of the filing of
the Certificate of Trust, and the Trust, the Fund, and any additional series created in the future will exist in perpetuity, unless earlier
terminated in accordance with the provisions of the Trust Agreement. Separate and distinct records shall be maintained for each Fund and
the assets associated with a Fund shall be held in such separate and distinct records (directly or indirectly, including a nominee or
otherwise) and accounted for in such separate and distinct records separately from the assets of any other series. The Fund and each future
series will be separate from all such series in respect of the assets and liabilities allocated to a Fund and each separate series and
will represent a separate investment portfolio of the Trust.
The Fund is a “commodity pool” as
defined by the Commodity Exchange Act (“CEA”). Consequently, the Sponsor has registered as a commodity pool operator (“CPO”)
with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).
The sole Trustee of the Trust is Wilmington Trust,
N.A. (the “Trustee”), and the Trustee serves as the Trust’s corporate trustee as required under the Delaware Statutory
Trust Act (“DSTA”). The Trustee’s principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890.
The Trustee is unaffiliated with the Sponsor. The rights and duties of the Trustee and the Sponsor with respect to the offering of the
Shares and Fund management and the shareholders are governed by the provisions of the DSTA and by the Trust Agreement.
BDRY commenced trading on the NYSE Arca on March
22, 2018 and trades under the symbol “BDRY”.
The Fund is designed and managed to track the
performance of a portfolio (a “Benchmark Portfolio”) consisting of futures contracts (the “Benchmark Component Instruments”).
Breakwave Dry Bulk Shipping ETF
The Investment Objective of the Fund
BDRY’s investment objective is to provide
investors with exposure to the daily change in the price of dry bulk freight futures by tracking the performance of a portfolio (the “BDRY
Benchmark Portfolio” and consisting of exchange-cleared futures contracts on the cost of shipping dry bulk freight (“Freight
Futures”). BDRY seeks to achieve its investment objective by investing substantially all of its assets in the Freight Futures currently
constituting the BDRY Benchmark Portfolio.
The Benchmark Portfolio
The BDRY Benchmark Portfolio is maintained by
Breakwave Advisors LLC (“Breakwave”), which also serves as BDRY’s CTA. The BDRY Benchmark Portfolio consists of the
Freight Futures, which are a three-month strip of the nearest calendar quarter of futures contracts on specified indexes (each a “Reference
Index”) that measure rates for shipping dry bulk freight. Each Reference Index is published each United Kingdom business day by
the London-based Baltic Exchange Ltd. (the “Baltic Exchange”) and measures the charter rate for shipping dry bulk freight
in a specific size category of cargo ship – Capesize, Panamax or Supramax. The three Reference Indexes are as follows:
|
● |
Capesize: the Capesize 5TC Index; |
|
● |
Panamax: the Panamax 4TC Index; and |
|
● |
Supramax: the Supramax 6TC Index. |
The BDRY Benchmark Component Instruments currently
constituting the BDRY Benchmark Portfolio as of December 31, 2022 include:
Name |
|
Ticker |
|
Market
Value USD |
|
Baltic Panamax T/C Average Shipping Route Jan 23 |
|
BFFAP F23 Index |
|
$ |
4,638,840 |
|
Baltic Panamax T/C Average Shipping Route Feb 23 |
|
BFFAP G23 Index |
|
|
4,754,115 |
|
Baltic Panamax T/C Average Shipping Route Mar 23 |
|
BFFAP H23 Index |
|
|
5,675,010 |
|
Baltic Supramax Average Shipping Route Jan 23 |
|
S58FM F23 Index |
|
|
1,169,910 |
|
Baltic Supramax Average Shipping Route Feb 23 |
|
S58FM G23 Index |
|
|
1,147,965 |
|
Baltic Supramax Average Shipping Route Mar 23 |
|
S58FM H23 Index |
|
|
1,288,875 |
|
Baltic Capesize Time Charter Jan 23 |
|
BFFATC F23 Index |
|
|
6,759,450 |
|
Baltic Capesize Time Charter Feb 23 |
|
BFFATC G23 Index |
|
|
5,142,150 |
|
Baltic Capesize Time Charter Mar 23 |
|
BFFATC H23 Index |
|
|
6,234,300 |
|
The value of the Capesize 5TC Index is disseminated
at 11:00 a.m., London Time and the value of the Panamax 4TC Index and the Supramax 6TC Index are each disseminated at 1:00 p.m., London
Time. The Reference Index information disseminated by the Baltic Exchange also includes the components and value of each component in
each Reference Index. Such Reference Index information also is widely disseminated by Reuters and/or other major market data vendors.
BDRY seeks to achieve its investment objective
by investing substantially all of its assets in the Freight Futures currently constituting the BDRY Benchmark Portfolio. The BDRY Benchmark
Portfolio will include all existing positions to maturity and settle them in cash. During any given calendar quarter, the BDRY Benchmark
Portfolio will progressively increase its position to the next calendar quarter three-month strip, thus maintaining constant exposure
to the Freight Futures market as positions mature.
The BDRY Benchmark Portfolio will maintain long-only
positions in Freight Futures. The BDRY Benchmark Portfolio will include a combination of Capesize, Panamax and Supramax Freight Futures.
More specifically, the BDRY Benchmark Portfolio will include 50% exposure in Capesize Freight Futures contracts, 40% exposure in Panamax
Freight Futures contracts and 10% exposure in Supramax Freight Futures contracts. The BDRY Benchmark Portfolio will not include and the
Fund will not invest in swaps, non-cleared dry bulk freight forwards or other over-the-counter derivative instruments that are not cleared
through exchanges or clearing houses. The Fund may hold exchange-traded options on Freight Futures. The BDRY Benchmark Portfolio is maintained
by Breakwave and will be rebalanced annually. The Freight Futures currently constituting the Benchmark Portfolio, as well as the daily
holdings of the Fund will be available on the Fund’s website at www.drybulketf.com.
When establishing positions in Freight Futures,
BDRY will be required to deposit initial margin with a value of approximately 10% to 40% of the notional value of each Freight Futures
position at the time it is established. These margin requirements are established and subject to change from time to time by the relevant
exchanges, clearing houses or the Fund’s futures commission merchant (“FCM”). On a daily basis, the Fund will be obligated
to pay, or entitled to receive, variation margin in an amount equal to the change in the daily settlement level of its Freight Futures
positions. Any assets not required to be posted as margin with the FCM will be held at the Fund’s custodian in cash or cash equivalents.
BDRY will hold cash or cash equivalents such as
U.S. Treasuries or other high credit quality, short-term fixed-income or similar securities for direct investment or as collateral for
the U.S. Treasuries and for other liquidity purposes and to meet redemptions that may be necessary on an ongoing basis. The Fund may also
realize interest income from its holdings in U.S. Treasuries or other market rate instruments.
The Sponsor
ETF Managers Capital, LLC is the sponsor of the
Trust and the Fund. The Sponsor is a Delaware limited liability company, formed on June 12, 2014. The principal office is located at 30
Maple Street, Suite 2, Summit, NJ 07901. The Sponsor is registered as a commodity pool operator (“CPO”) with the Commodity
Futures Trading Commission (“CFTC”) and became a member of the National Futures Association (“NFA”) on September
23, 2014. The Trust and the Fund operate pursuant to the Trust Agreement.
The Sponsor is a wholly-owned subsidiary of Exchange
Traded Managers Group LLC (“ETFMG”), a limited liability company domiciled and headquartered in New Jersey. The Sponsor maintains
its main business office at 30 Maple Street, Suite 2, Summit, NJ 07901.
Under the Trust Agreement, the Sponsor has exclusive
management and control of all aspects of the Trust’s business. The Trustee has no duty or liability to supervise the performance
of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor. The shareholders have no voice in the
day to day management of the business and operations of the Fund and the Trust, other than certain limited voting rights as set forth
in the Trust Agreement. In the course of its management of the business and affairs of the Fund and the Trust, the Sponsor may, in its
sole and absolute discretion, appoint an affiliate or affiliates of the Sponsor as additional sponsors and retain such persons, including
affiliates of the Sponsor, as it deems necessary to effectuate and carry out the purposes, business and objectives of the Trust.
Breakwave Dry Bulk Shipping ETF
During the three months ended December 31, 2022,
freight rates declined; with the Baltic Dry Index, an index that tracks global spot rates for dry bulk shipping, ending the quarter down
approximately 14%. Slow activity from China, which accounts for the great majority of dry bulk trade, was the main reason for the poor
performance. China’s zero tolerance policy towards the Covid pandemic has led to a considerable slowdown in industrial activity;
and as a result, in infrastructure spending, while the country’s real estate sector remains extremely weak versus recent history.
The combination of those two factors has translated to weaker demand for iron ore, the main ingredient required for steelmaking. The impact
of slower economic activity in China was felt across all dry bulk segments, with the sub-Cape sector freight rates dropping to two-year
lows. Towards the end of the quarter a partial recovery in Capsize spot rates offered some relief in sentiment, but such a recovery remained
quite fragile.
During the three months ended December 31, 2022,
freight futures experienced a decline reflecting the deterioration in spot rates but also sour sentiment coming from the global weak macroeconomic
environment. With the first calendar quarter of the year historically being the weakest period of the year, freight futures also reflected
such an expectation, and although weather remains the main determinant of future performance during thew winter months, it is still expected
based on futures prices that the first quarter of the year will average below last year’s level. BDRY closely tracked the performance
of short-term dry bulk freight futures. However, with December freight futures contracts settling at a better level versus previous expectations,
first quarter futures performance was offset by the stronger December realized rates and, as such, BDRY ended the quarter relatively flat.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
The per Share market value of BDRY and its NAV
tracked closely for the three months ended December 31, 2022.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
The per Share market value of BDRY and its NAV
tracked closely for the six months ended December 31, 2022.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
The per Share market value of BDRY and its NAV
tracked closely for the three months ended December 31, 2021.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
The per Share market value of BDRY and its NAV
tracked closely for the six months ended December 31, 2021.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
NEITHER THE PAST PERFORMANCE OF THE FUND
NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE
PERFORMANCE.
The graphs above compare the returns of BDRY with
the benchmark portfolio returns for the three months ended December 31, 2022 and 2021, and the six months ended December 31, 2022 and
2021. The difference in the NAV price the benchmark value often results in the appearance of a NAV premium or discount to the benchmark.
Differences in the benchmark return and the BDRY net asset value per share are due primarily to the following factors:
|
● |
Benchmark
portfolio uses settlement prices of freight futures vs. BDRY closing Share price, |
|
● |
Benchmark
portfolio roll methodology assumes rolls that can happen even at fractions of lots vs. BDRY that uses the real minimum market lot
available (5 days per month), |
|
● |
Benchmark
portfolio assumes rolls are happening at the settlement price of the day vs. that buys at a transaction price during the day that
might or might not be equal to the settlement price, |
|
● |
Benchmark
portfolio assumes no trading commissions vs. BDRY that pays 10bps for each transaction, |
|
● |
Benchmark
portfolio assumes no clearing fees vs. BDRY that pays approximately 3-5bps of total clearing fees for each trade, |
|
● |
Benchmark
portfolio assumes no management fees vs. BDRY fee structure of 3.5% of average net assets on an annualized basis, and |
|
● |
Creations
and redemptions that lead to transactions that occur at prices that might be different than the settlement prices |
There
are no competitors. BDRY is the only Freight futures ETF globally.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2022
Fund Share Price Performance
During the three months ended December 31, 2022,
the NYSE Arca market value of each Share increased (+1.66%) from $9.04 per Share, representing the closing trade on September 30, 2022,
to $9.19 per Share, representing the closing price on December 30, 2022. The Share price high and low for the three months ended December
31, 2021 and related change from the closing Share price on September 30, 2022 were as follows: Shares traded from a high of $10.40 per
Share (+15.04%) on October 4, 2022 to a low of $6.82 per Share (-24.56%) on November 22, 2021.
Fund Share Net Asset Performance
For the three months ended December 31, 2022,
the net asset value of each Share increased (+7.20%) from $8.75 per Share to $9.38 per Share. Gains in the investments and futures contracts
offset the net investment loss resulting in the overall increase in the NAV per Share during the three months ended December 31, 2022.
Net income for the three months ended December
31, 2022, was $3,017,323, resulting from net realized losses on investments and futures contracts of $3,773,390, unrealized gains on futures
contracts of $7,140,215 and the net investment loss of $349,502.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2021
Fund Share Price Performance
During the three months ended December 31, 2021,
the NYSE Arca market value of each Share decreased (-18.11%) from $36.01 per Share, representing the closing trade on September 30, 2021,
to $29.49 per Share, representing the closing price on December 31, 2021. The Share price high and low for the three months ended December
31, 2021 and related change from the closing Share price on September 30, 2021 were as follows: Shares traded from a high of $42.22 per
Share (+17.25%) on October 6, 2021 to a low of $19.12 per Share (-46.90%) on November 16, 2021.
Fund Share Net Asset Performance
For the three months ended December 31, 2021,
the net asset value of each Share decreased (-16.76%) from $35.62 per Share to $29.65 per Share. Losses in the investments and futures
contracts and the net investment loss resulted in the overall decrease in the NAV per Share during the three months ended December 31,
2021.
Net loss for the three months ended December 31,
2021, was $18,940,894, resulting from net realized losses on investments and futures contracts of $1,117,138, unrealized losses on futures
contracts of $16,869,110 and the net investment loss of $954,646.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2022
Fund Share Price Performance
During the six months ended December 31, 2022,
the NYSE Arca market value of each Share decreased (-46.48%) from $17.17 per Share, representing the closing trade on June 30, 2022, to
$9.19 per Share, representing the closing price on December 30, 2022. The Share price high and low for the six months ended December 31,
2022 and related change from the closing Share price on June 30, 2022 were as follows: Shares traded from a high of $17.16 per Share (-0.06%)
on July 1, 2022 to a low of $6.75 per Share (-60.69%) on August 30, 2022.
Fund Share Net Asset Performance
For the six months ended December 31, 2022, the
net asset value of each Share decreased (-45.02%) from $17.06 per Share to $9.38 per Share. Losses in the futures contracts and the net
investment loss, resulted in the overall decrease in the NAV per Share during the six months ended December 31, 2022.
Net loss for the six months ended December 31,
2022, was $19,334,136, resulting from net realized losses on investments and futures contracts of $32,238,195, unrealized gains on futures
contracts of $13,609,790 and the net investment loss of $705,731.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2021
Fund Share Price Performance
During the six months ended December 31, 2021,
the NYSE Arca market value of each Share increased (+0.48%) from $29.35 per Share, representing the closing trade on June 30, 2021, to
$29.49 per Share, representing the closing price on December 31, 2021. The Share price high and low for the six months ended December
31, 2021 and related change from the closing Share price on June 30, 2021 were as follows: Shares traded from a high of $42.22 per Share
(+43.85%) on October 6, 2021 to a low of $19.12 per Share (-34.86%) on November 16, 2021.
Fund Share Net Asset Performance
For the six months ended December 31, 2021, the
net asset value of each Share increased (+2.67%) from $28.88 per Share to $29.65 per Share. Unrealized losses in the futures contracts
offset net realized gains on the futures contracts, and coupled with the net investments loss, would typically be expected to result in
a decrease in the NAV per Share. The timing of Fund Shares created and redeemed positively impacted the otherwise negative investment
performance which resulted in the overall slight increase in the NAV per Share during the six months ended December 31, 2021.
Net loss for the six months ended December 31,
2021, was $1,882,095, resulting from net realized gains on investments and futures contracts of $18,463,560, unrealized losses on futures
contracts of $18,595,890 and the net investment loss of $1,749,765.
Calculating NAV
The Fund’s NAV is calculated by:
|
● |
Taking the current market value of its total assets; |
|
● |
Subtracting any liabilities; and |
|
● |
Dividing that total by the total number of outstanding shares. |
The Administrator calculates the NAV of the Fund
once each NYSE Arca trading day. The NAV for a particular trading day is released after 4:00 p.m. E.T. Trading during the core trading
session on the NYSE Arca typically closes at 4:00 p.m. E.T. The Administrator uses the Baltic Exchange settlement price for the Freight
Futures and option contracts. The Administrator calculates or determines the value of all other Fund investments using market quotations,
if available, or other information customarily used to determine the fair value of such investments as of the close of the NYSE Arca (normally
4:00 p.m. E.T.), in accordance with the current Administrative Agency Agreement among U.S. Bancorp Fund Services, the Fund and the Sponsor.
In addition, in order to provide updated information
relating to the Fund for use by investors and market professionals, an updated indicative fund value (“IFV”) is made available
through on-line information services throughout the core trading session hours of 9:30 a.m. E.T. to 4:00 p.m. E.T. on each trading day.
The IFV is calculated by using the prior day’s closing NAV per share of the Fund as a base and updating that value throughout the
trading day to reflect changes in the most recently reported trade price for the futures and/or options held by the Fund. Certain Freight
Futures brokers provide real time pricing information to the general public either through their websites or through data vendors such
as Bloomberg or Reuters. The IFV disseminated during NYSE Arca core trading session hours should not be viewed as an actual real time
update of the NAV, because the NAV is calculated only once at the end of each trading day based upon the relevant end of day values of
the Fund’s investments.
The IFV is disseminated on a per share basis every
15 seconds during regular NYSE Arca core trading session hours. The customary trading hours of the Freight Futures trading are 3:00 a.m.
E.T. to 12:00 p.m. E.T. This means that there is a gap in time at the beginning and/or the end of each day during which a Fund’s
shares are traded on the NYSE Arca, but real-time trading prices for contracts are not available. During such gaps in time the IFV will
be calculated based on the end of day price of such contracts from the Baltic Exchange immediately preceding the trading session. In addition,
other investments held by the Fund will be valued by the Administrator, using rates and points received from client-approved third party
vendors (such as Reuters and WM Company) and advisor or broker-dealer quotes. These investments will not be included in the IFV.
The NYSE Arca disseminates the IFV through the
facilities of CTA/CQ High Speed Lines. In addition, the IFV is published on the NYSE Arca’s website and is available through on-line
information services such as Bloomberg and Reuters.
Dissemination of the IFV provides additional information
that is not otherwise available to the public and is useful to investors and market professionals in connection with the trading of the
Fund’s shares on the NYSE Arca. Investors and market professionals are able throughout the trading day to compare the market price
of the Fund’s shares and the IFV. If the market price of the Fund’s shares diverges significantly from the IFV, market professionals
will have an incentive to execute arbitrage trades. For example, if the Fund’s shares appear to be trading at a discount compared
to the IFV, a market professional could buy the Fund shares on the NYSE Arca and take the opposite position in Freight Futures. Such arbitrage
trades can tighten the tracking between the market price of the Fund’s shares and the IFV and thus can be beneficial to all market
participants.
Critical Accounting Policies
The Fund’s critical accounting policies
are as follows:
Preparation of the financial statements and related
disclosures in accordance with U.S. generally accepted accounting principles requires the application of appropriate accounting rules
and guidance, as well as the use of estimates. The Fund’s application of these policies involves judgments and the use of estimates.
Actual results may differ from the estimates used and such differences could be material. The Fund holds a significant portion of its
assets in futures contracts and money market funds, which are held at fair value.
The Fund calculates its net asset value as of
the NAV Calculation Time as described above.
The values which are used by the Fund for its
Freight Futures are provided by the Fund’s commodity broker, which uses market prices when available. In addition, the Fund 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.
Credit Risk
When the Fund enters into Benchmark Component
Instruments, it will be exposed to the credit risk that the counterparty will not be able to meet its obligations. For purposes of credit
risk, the counterparty for the Benchmark Component Instruments traded on or cleared by the Baltic Exchange and other futures exchanges
is the clearinghouse associated with those exchanges. In general, 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, which should significantly reduce credit risk. There
can be no assurance that any counterparty, clearinghouse, or their financial backers will satisfy their obligations to the Fund.
The Sponsor will attempt to minimize certain of
these market and credit risks by normally:
|
● |
executing and clearing trades with creditworthy counterparties, as determined by the Sponsor; |
|
● |
limiting the outstanding amounts due from counterparties of the Funds; |
|
● |
not posting margin directly with a counterparty; |
|
● |
limiting the amount of margin or premium posted at the FCM; and |
|
● |
ensuring that deliverable contracts are not held to such a date when delivery of an underlying asset could be called for. |
The Commodity Exchange Act (“CEA”)
requires all FCMs, such as the Fund’s clearing brokers, to meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’ funds and positions, and to maintain specified books
and records open to inspection by the staff of the CFTC. The CFTC has similar authority over introducing brokers, or persons who solicit
or accept orders for commodity interest trades but who do not accept margin deposits for the execution of trades. The CEA authorizes the
CFTC to regulate trading by FCMs and by their officers and directors, permits the CFTC to require action by exchanges in the event of
market emergencies, and establishes an administrative procedure under which customers may institute complaints for damages arising from
alleged violations of the CEA. The CEA also gives the states powers to enforce its provisions and the regulations of the CFTC.
On November 14, 2013, the CFTC published final
regulations that require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity
standards, customer disclosures and auditing and examination programs for FCMs. The rules are intended to afford greater assurances to
market participants that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of
the risks of futures trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust
manner, the capital and liquidity of FCMs are strengthened to safeguard the continued operations and the auditing and examination programs
of the CFTC and the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner.
Liquidity and Capital Resources
The Fund does not anticipate making use of borrowings
or other lines of credit to meet its obligations. The Fund meets its liquidity needs in the normal course of business from the proceeds
of the sale of its investments or from the cash, cash equivalents that it holds. The Fund’s liquidity needs include: redeeming its
shares, providing margin deposits for existing Benchmark Component Instruments, the purchase of additional Benchmark Component Instruments,
and paying expenses.
The Fund generates cash primarily from (i) the
sale of Creation Baskets and (ii) interest earned on cash, cash equivalents and its investments in collateralizing Treasury Securities.
Generally, all of the net assets of the Fund are allocated to trading in Benchmark Component Instruments. Most of the assets of the Fund
are held in Treasury Instruments, cash and/or cash equivalents that could or are used as margin or collateral for trading in Benchmark
Component Instruments. The percentage that such assets bear to the total net assets will vary from period to period as the market values
of the Benchmark Component Instruments change. Interest earned on interest-bearing assets of the Fund are paid to the Fund.
The investments of the Fund in Benchmark Component
Instruments could be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. Such
conditions could prevent the Fund from promptly liquidating a position in Benchmark Component Instruments.
Market Risk
Trading in Benchmark Component Instruments such
as futures contracts will involve the Fund entering into contractual commitments to purchase or sell specific amounts of instruments at
a specified date in the future. The gross or face amount of the contracts is expected to significantly exceed the future cash requirements
of the Fund as the Fund intends to close out any open positions prior to the contractual expiration date. As a result, the Fund’s
market risk is the risk of loss arising from the decline in value of the contracts, not from the need to make delivery under the contracts.
The Fund considers the “fair value” of derivative instruments to be the unrealized gain or loss on the contracts. The market
risk associated with the commitment by the Fund to purchase a specific contract will be limited to the aggregate face amount of the contracts
held.
The exposure of the Fund to market risk will depend
on a number of factors including the markets for the specific instrument, the volatility of interest rates and foreign exchange rates,
the liquidity of the instrument-specific market and the relationships among the contracts held by the Fund.
Regulatory Environment
The regulation of futures markets, futures contracts,
and futures exchanges has historically been comprehensive. The CFTC and the exchanges are authorized to take extraordinary actions in
the event of a market emergency including, for example, the retroactive implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the suspension of trading.
The regulation of commodity interest transactions
in the United States is an evolving area of law and is subject to ongoing modification by governmental and judicial action. Considerable
regulatory attention has been focused on non-traditional investment pools that are publicly distributed in the United States. There is
a possibility of future regulatory changes within the United States altering, perhaps to a material extent, the nature of an investment
in the Fund, or the ability of the Fund to continue to implement its investment strategies. In addition, various national governments
outside of the United States have expressed concern regarding the disruptive effects of speculative trading in the commodities markets
and the need to regulate the derivatives markets in general. The effect of any future regulatory change on the Fund is impossible to predict
but could be substantial and adverse.
The CFTC possesses exclusive jurisdiction to regulate
the activities of commodity pool operators and commodity trading advisors with respect to “commodity interests,” such as futures,
swaps and options, and has adopted regulations with respect to the activities of those persons and/or entities. Under the CEA, a registered
CPO, such as the Sponsor, is required to make annual filings with the CFTC and NFA describing its organization, capital structure, management
and controlling persons. In addition, the CEA authorizes the CFTC to require and review books and records of, and documents prepared by,
registered CPOs. Pursuant to this authority, the CFTC requires CPOs to keep accurate, current and orderly records for each pool that they
operate. The CFTC may suspend the registration of a commodity pool operator (1) if the CFTC finds that the operator’s trading practices
tend to disrupt orderly market conditions, (2) if any controlling person of the operator is subject to an order of the CFTC denying such
person trading privileges on any exchange, and (3) in certain other circumstances. Suspension, restriction or termination of the Sponsor’s
registration as a commodity pool operator would prevent it, until that registration were to be reinstated, from managing the Fund, and
might result in the termination of the Fund if a successor sponsor is not elected pursuant to the Trust Agreement.
The Fund’s investors are afforded prescribed
rights for reparations under the CEA. Investors may also be able to maintain a private right of action for violations of the CEA. The
CFTC has adopted rules implementing the reparation provisions of the CEA, which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor broker or an FCM, introducing broker, commodity trading advisor, CPO, and
their respective associated persons.
Pursuant to authority in the CEA, the NFA has
been formed and registered with the CFTC as a registered futures association. At the present time, the NFA is the only self-regulatory
organization for commodity interest professionals, other than futures exchanges. The CFTC has delegated to the NFA responsibility for
the registration of CPOs and FCMs and their respective associated persons. The Sponsor and the Fund’s clearing broker are members
of the NFA. As such, they will be subject to NFA standards relating to fair trade practices, financial condition and consumer protection.
The NFA also arbitrates disputes between members and their customers and conducts registration and fitness screening of applicants for
membership and audits of its existing members. Neither the Trust nor the Fund are required to become a member of the NFA.
The regulations of the CFTC and the NFA prohibit
any representation by a person registered with the CFTC or by any member of the NFA, that registration with the CFTC, or membership in
the NFA, in any respect indicates that the CFTC or the NFA has approved or endorsed that person or that person’s trading program
or objectives. The registrations and memberships of the parties described in this summary must not be considered as constituting any such
approval or endorsement. Likewise, no futures exchange has given or will give any similar approval or endorsement.
Futures exchanges in the United States are subject
to varying degrees of regulation under the CEA depending on whether such exchange is a designated contract market, exempt board of trade
or electronic trading facility. Clearing organizations are also subject to the CEA and the rules and regulations adopted thereunder as
administered by the CFTC. The CFTC’s function is to implement the CEA’s objectives of preventing price manipulation and excessive
speculation and promoting orderly and efficient commodity interest markets. In addition, the various exchanges and clearing organizations
themselves exercise regulatory and supervisory authority over their member firms.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) was enacted in response to the economic crisis of 2008 and 2009 and it significantly
altered the regulatory regime to which the securities and commodities markets are subject. To date, the CFTC has issued proposed or final
versions of almost all of the rules it is required to promulgate under the Dodd-Frank Act. The provisions of the new law include the requirement
that position limits be established on a wide range of commodity interests, including agricultural, energy, and metal-based commodity
futures contracts, options on such futures contracts and cleared and uncleared swaps that are economically equivalent to such futures
contracts and options; new registration and recordkeeping requirements for swap market participants; capital and margin requirements for
“swap dealers” and “major swap participants,” as determined by the new law and applicable regulations; reporting
of all swaps transactions to swap data repositories; and the mandatory use of clearinghouse mechanisms for sufficiently standardized swap
transactions that were historically entered into in the over-the-counter market, but are now designated as subject to the clearing requirement;
and margin requirements for over-the counter swaps that are not subject to the clearing requirements.
The Dodd-Frank Act was intended to reduce systemic
risks that may have contributed to the 2008/2009 financial crisis. Since the first draft of what became the Dodd-Frank Act, supporters
and opponents have debated the scope of the legislation. As the administrations of the U.S. change, the interpretation and implementation
will change with them. Nevertheless, regulatory reform of any kind may have a significant impact on U.S. regulated entities.
Current rules and regulations under the Dodd-Frank
Act require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards,
customer disclosures and auditing and examination programs for FCMs. The rules are intended to afford greater assurances to market participants
that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of the risks of futures
trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust manner, the capital
and liquidity of FCMs are strengthened to safeguard the continued operations and the auditing and examination programs of the CFTC and
the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner.
Regulatory bodies outside the U.S. have also passed
or proposed, or may propose in the future, legislation similar to that proposed by the Dodd-Frank Act or other legislation containing
other restrictions that could adversely impact the liquidity of and increase costs of participating in the commodities markets. For example,
the European Union Markets in Financial Instruments Directive (Directive 2014/65/EU) and Markets in Financial Instruments Regulation (Regulation
(EU) No 600/2014) (together “MiFID II”), which has applied since January 3, 2018, governs the provision of investment services
and activities in relation to, as well as the organized trading of, financial instruments such as shares, bonds, units in collective investment
schemes and derivatives. In particular, MiFID II requires EU Member States to apply position limits to the size of a net position which
a person can hold at any time in commodity derivatives traded on EU trading venues and in “economically equivalent” over-the-counter
(“OTC”) contracts. By way of further example, the European Market Infrastructure Regulation (Regulation (EU) No 648/2012,
as amended) (“EMIR”) introduced certain requirements in respect of OTC derivatives including: (i) the mandatory clearing of
OTC derivative contracts declared subject to the clearing obligation; (ii) risk mitigation techniques in respect of un-cleared OTC derivative
contracts, including the mandatory margining of un-cleared OTC derivative contracts; and (iii) reporting and recordkeeping requirements
in respect of all derivatives contracts. In the event that the requirements under EMIR and MiFID II apply, these are expected to increase
the cost of transacting derivatives.
In addition, considerable regulatory attention
has been focused on non-traditional publicly distributed investment pools such as the Fund. Furthermore, various national governments
have expressed concern regarding the disruptive effects of speculative trading in certain commodity markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory change on the Fund is impossible to predict but could be substantial
and adverse.
Off Balance Sheet Financing
As of December 31, 2022, neither the Trust nor
the Fund have any loan guarantees, 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 service providers undertake in
performing services which are in the best interests of the Fund. While the exposure of the Fund under these indemnification provisions
cannot be estimated, they are not expected to have a material impact on the financial position of the Fund.
Redemption Basket Obligation
Other than as necessary to meet the investment
objective of the Fund and pay the contractual obligations described below, the Fund will require liquidity to redeem Redemption Baskets.
The Fund intends to satisfy this obligation through the transfer of cash of the Fund (generated, if necessary, through the sale of Treasury
Instruments) in an amount proportionate to the number of Shares being redeemed.
Contractual Obligations
The primary contractual obligations of the Fund
will be with the Sponsor and certain other service providers.
Management and CTA Fees
BDRY pays the Sponsor a management fee (the “Sponsor
Fee”) in consideration of the Sponsor’s advisory services to the Fund. Additionally, BDRY pays its commodity trading advisor
a license and service fee (the “CTA Fee”).
BDRY pays the Sponsor Fee, monthly in arrears,
in an amount equal to the greater of 0.15% per year of BDRY’s average daily net assets; or $125,000. BDRY’s Sponsor Fee is
paid in consideration of the Sponsor’s management services to BDRY. BDRY also pays Breakwave the CTA Fee monthly in arrears, for
the use of BDRY’s Benchmark Portfolio in an amount equal to 1.45% per annum of BDRY’s average daily net assets.
Breakwave has agreed to waive its CTA Fee and
the Sponsor has agreed to correspondingly assume the remaining expenses of BDRY so that BDRY’s expenses do not exceed an annual
rate of 3.50%, excluding brokerage commissions, interest expense, and extraordinary expenses, of the value of BDRY’s average daily
net assets (the “BDRY Expense Cap”). The assumption of expenses and waiver of BDRY’s CTA Fee are contractual on the
part of the Sponsor and Breakwave, respectively, through March 31, 2024. Breakwave may recoup any fees waived pursuant to the BDRY Expense
Cap on or after September 1, 2022. No repayment will be made if such repayment causes BDRY’s total expenses after the repayment
to exceed either (i) the BDRY Expense Cap in place at the time such amounts were waived, or (ii) the then current BDRY Expense Cap. Such
recoupment is limited to three years from the date the amount is initially waived. If after that March 31, 2024, the Sponsor and/or Breakwave
no longer assumed expenses or waived the CTA Fee, respectively, BDRY could be adversely impacted, including in its ability to achieve
its investment objective.
The assumption of expenses by the Sponsor for
BDRY, pursuant to the BDRY Expense Cap, amounted to $-0- and $-0- for the three months ended December 31, 2022 and 2021, respectively,
and $-0- and $-0- for the six months ended December 31, 2022 and 2021, respectively, as disclosed in the Statements of Operations. The
waiver of Breakwave’s CTA fees, pursuant to the undertaking, amounted to $38,707 and $-0- for the three months ended December 31,
2022 and 2021, respectively, and $66,332 and $-0- for the six months ended December 31, 2022 and 2021, respectively, as disclosed in the
Statements of Operations. BDRY currently accrues its daily expenses based upon established individual expense amounts or the BDRY Expense
Cap, whichever aggregate amount is less. At the end of each month, the accrued amount is remitted to the Sponsor as the Sponsor is responsible
for the payment of the routine operational, administrative and other ordinary expenses of the Fund. BDRY’s total expenses amounted
to $505,629 and $955,267 for the three months ended December 31, 2022 and 2021, respectively, and $976,903 and $1,751,167, for the six
months ended December 31, 2022 and 2021, respectively, as disclosed in the Statements of Operations.
The Fund’s ongoing fees, costs and expenses
of its operation, not subject to the Expense Cap include brokerage and other fees and commissions incurred in connection with the trading
activities of the Fund, and extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and
any indemnification related thereto). Expenses subject to the Expense Cap include (i) expenses incurred in connection with registering
additional Shares of the Fund or offering Shares of the Fund; (ii) the routine expenses associated with the preparation and, if required,
the printing and mailing of monthly, quarterly, annual and other reports required by applicable U.S. federal and state regulatory authorities,
Trust meetings and preparing, printing and mailing proxy statements to Shareholders; (iii) the routine services of the Trustee, legal
counsel and independent accountants; (iv) routine accounting, bookkeeping, custodial and transfer agency services, whether performed by
an outside service provider or by affiliates of the Sponsor; (v) postage and insurance; (vi) costs and expenses associated with client
relations and services; (vii) costs of preparation of all federal, state, local and foreign tax returns and any taxes payable on the income,
assets or operations of the Fund.
While the Sponsor has agreed to pay registration
fees to the SEC and any other regulatory agency in connection with the initial offering and sale of the Shares offered through the Fund’s
prospectus, the legal, printing, accounting and other expenses associated with such registration, the Fund will be responsible for any
registration fees and related expenses incurred in connection with any future offer and sale of Shares of the Fund in excess of those
offered through its initial prospectus.
Any general expenses of the Trust will be allocated
to the Fund and any other future series of the Trust as determined by the Sponsor in its sole and absolute discretion. The Trust is also
responsible for extraordinary expenses, including, but not limited to, legal claims and liabilities and litigation costs and any indemnification
related thereto. The Trust and/or the Sponsor may be required to indemnify the Trustee, Distributor or Administrator under certain circumstances.
The parties cannot anticipate the amount of payments
that will be required under these arrangements for future periods as the NAV and trading levels to meet investment objectives for the
Fund 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 the Fund’s existence. The parties may terminate these agreements
earlier for certain reasons listed in the agreements.