INVESCO DB COMMODITY INDEX TRACKING FUND This information should be read in conjunction with the financial statements and notes included in Item 8 of Part II of this Report. The discussion and analysis which follows may contain trend analysis and other forward-looking statements. See "Cautionary Statement Concerning Forward-Looking Information" above. You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the Fund and the Managing Owner undertake no obligation to publicly update or revise any forward-looking statements 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/Introduction
Invesco Capital Management LLC ("Invesco") has served as the managing owner (the
"Managing Owner"), commodity pool operator and commodity trading advisor of the
Fund since February 23, 2015 . The Managing Owner is registered with the
Commodity Futures Trading Commission (the "CFTC") as a commodity pool operator
and a commodity trading advisor, and it is a member firm of the National Futures
Association ("NFA").
The Fund seeks to track changes, whether positive or negative, in the level of
the DBIQ Optimum Yield Diversified Commodity Index Excess ReturnTM (the "Index")
over time, plus the excess, if any, of the sum of the Fund's interest income
from its holdings of United States Treasury Obligations ("Treasury Income"),
dividends from its holdings in money market mutual funds (affiliated or
otherwise) ("Money Market Income") and dividends or distributions of capital
gains from its holdings of T-Bill ETFs (as defined below) ("T-Bill ETF Income")
over the expenses of the Fund. The Fund invests in futures contracts in an
attempt to track its Index. The Index is intended to reflect the change in
market value of the commodity sector. The commodities comprising the Index are
Light Sweet Crude Oil, Ultra Low Sulphur Diesel (also commonly known as Heating
Oil), Aluminum, Gold, Corn, Wheat, Brent Crude Oil, Copper Grade A, Natural Gas,
RBOB Gasoline (reformulated gasoline blendstock for oxygen blending, or "RBOB"),
Silver, Soybeans, Sugar and Zinc (each, an "Index Commodity," and collectively,
the "Index Commodities ").
The Fund may invest directly in United States Treasury Obligations. The Fund may
also gain exposure to United States Treasury Obligations through investments in
exchange-traded funds ("ETFs") (affiliated or otherwise) that track indexes that
measure the performance of United States Treasury Obligations with a maximum
remaining maturity of up to 12 months ("T-Bill ETFs"). The Fund holds as
collateral United States Treasury Obligations, money market mutual funds and
T-Bill ETFs (affiliated or otherwise), if any, for margin and/or cash management
purposes. While the Fund's performance reflects the appreciation and
depreciation of those holdings, the Fund's performance, whether positive or
negative, is driven primarily by its strategy of trading futures contracts with
the aim of seeking to track the Index.
The Fund pursues its investment objective by investing in a portfolio of
exchange-traded commodity futures contracts that expire in a specific month and
trade on a specific exchange (the "Index Contracts") in the Index Commodities .
The notional amounts of each Index Commodity included in the Index are broadly
in proportion to historic levels of the world's production and stocks of the
Index Commodities . The Fund also holds United States Treasury Obligations and
T-Bill ETFs, if any, for deposit with Morgan Stanley & Co. LLC , the Fund's
commodity broker (the "Commodity Broker") as margin, to the extent permissible
under CFTC rules and United States Treasury Obligations, cash, money market
mutual funds and T-Bill ETFs (affiliated or otherwise), if any, on deposit with
The Bank of New York Mellon (the "Custodian"), for cash management purposes. The
aggregate notional value of the commodity futures contracts owned by the Fund is
expected to approximate the aggregate net asset value ("NAV") of the Fund, as
opposed to the aggregate Index value.
The CFTC and certain futures exchanges impose position limits on futures
contracts, including on Index Contracts. As the Fund approaches or reaches
position limits with respect to an Index Commodity, the Fund may commence
investing in Index Contracts that reference other Index Commodities . In those
circumstances, the Fund may also trade in futures contracts based on commodities
other than Index Commodities that the Managing Owner reasonably believes tend to
exhibit trading prices that correlate with an Index Contract.
The Managing Owner may determine to invest in other futures contracts if at any
time it is impractical or inefficient to gain full or partial exposure to an
Index Commodity through the use of Index Contracts. These other futures
contracts may or may not be based on an Index Commodity. When they are not, the
Managing Owner may seek to select futures contracts that it reasonably believes
tend to exhibit trading prices that correlate with an Index Contract.
The Shares are intended to provide investment results that generally correspond
to the changes, positive or negative, in the levels of the Index over time. The
value of the Shares is expected to fluctuate in relation to changes in the value
of the Fund's portfolio. The market price of the Shares may not be identical to
the NAV per Share, but these two valuations are expected to be very close.
23
--------------------------------------------------------------------------------Margin Calls
"Initial" or "original" margin is the minimum amount of funds that must be deposited by a futures trader with his commodity broker in order to initiate futures trading or to maintain an open position in futures contracts. "Maintenance" margin is the amount (generally less than initial margin) to which a trader's account may decline before he must deliver additional margin. A margin deposit is like a cash performance bond. It helps assure the futures trader's performance of the futures contract that the trader purchases or sells. Futures contracts are customarily bought and sold on margin that represents a very small percentage (ranging upward from less than 2%) of the purchase price of the underlying commodity being traded. Because of such low margins, price fluctuations occurring in the futures markets may create profits and losses that are greater, in relation to the amount invested, than are customary in other forms of investments. The minimum amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which such contract is traded, and may be modified from time to time by the exchange during the term of the contract. "Variation margin" is assessed daily to reflect changes in the value of the position.
Brokerage firms carrying accounts for traders in futures contracts may not accept lower, and generally require higher, amounts of margin as a matter of policy in order to afford further protection for themselves.
Margin requirements are computed each day by a commodity broker. When the market value of a particular open futures contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. If the margin call is not met within a reasonable time, the broker may close out the Fund's position. With respect to the Managing Owner's trading, only the Managing Owner, and not the Fund or its Shareholders personally, will be subject to margin calls.
Position Limits and/or Accountability Levels
The Fund has not reached position limits with respect to the 2020 and 2019 reporting periods.
Net Asset Value
NAV means the total assets of the Fund, including, but not limited to, all commodity futures contracts, cash and investments less total liabilities of the Fund, each determined on the basis ofU.S. generally accepted accounting principles ("U.S. GAAP"), consistently applied under the accrual method of accounting. All open commodity futures contracts will be calculated at their then current market value, which will be based upon the settlement price for that particular commodity futures contract traded on the applicable primary exchange on the date with respect to which NAV is being determined. Securities for which market quotations are not readily available or became unreliable are valued at fair value as determined in good faith following procedures approved by the Managing Owner. The amount of any distribution is a liability of the Fund from the day when the distribution is declared until it is paid.
NAV per Share is the NAV of the Fund divided by the number of outstanding Shares.
Market Risk
Trading in futures contracts involves the Fund entering into contractual commitments to purchase a particular commodity at a specified date and price. The market risk associated with the Fund's commitments to purchase commodities is limited to the gross or face amount of the contracts held. The Fund's exposure to market risk is also influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Fund's trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of the investors' capital.
Credit Risk
When the Fund enters into futures contracts, the Fund is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded onUnited States and on most foreign futures exchanges is the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, is designed to disperse and mitigate the credit risk posed by any other one member. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Fund. The Commodity Broker, when acting as the Fund's futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Fund all assets of the Fund relating to domestic futures trading. The Commodity Broker is not allowed to commingle such assets with other assets of the Commodity Broker. In addition, CFTC regulations also require the Commodity Broker to hold in a secure account assets of the Fund related to foreign futures trading. While these legal requirements are designed to protect the customers of futures commission 24 -------------------------------------------------------------------------------- merchants, a failure by the Commodity Broker to comply with those requirements would be likely to have a material adverse effect on the Fund in the event that the Commodity Broker became insolvent or suffered other financial distress.
Liquidity
The Fund's entire source of capital is derived from the Fund's offering of Shares to Authorized Participants. The Fund in turn allocates its net assets to commodity futures trading. A significant portion of the NAV is held inUnited States Treasury Obligations, which may be used as margin for the Fund's trading in commodity futures contracts and United States Treasury Obligations, money market mutual funds, cash and T-Bill ETFs, if any, which may be used for cash management purposes. The percentage that United States Treasury Obligations bear to the total net assets will vary from period to period as the market values of the Fund's commodity interests change. A portion of the Fund'sUnited States Treasury Obligations is held for deposit with the Commodity Broker to meet margin requirements. All remaining cash, money market mutual funds, T-Bill ETFs, if any, and United States Treasury Obligations are on deposit with the Custodian. Interest earned on the Fund's interest-bearing funds and dividends from the Fund's holdings of money market mutual funds are paid to the Fund. Any dividends or distributions of capital gains received from the Fund's holdings of T-Bill ETFs, if any, are paid to the Fund. The Fund's commodity futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations or for other reasons. For example,U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as "daily price fluctuation limits" or "daily limits," and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a "limit price". Once a limit price has been reached in a particular contract, it is usually the case that no trades may be made at a different price than specified in the limit. The duration of limit prices generally varies. Limit prices may have the effect of precluding the Fund from trading in a particular contract or requiring the Fund to liquidate contracts at disadvantageous times or prices. Either of those outcomes could adversely affect the Fund's ability to pursue its investment objective. Because the Fund trades futures contracts, its capital is at risk due to changes in the value of futures contracts (market risk) or the inability of counterparties (including the Commodity Broker and/or exchange clearinghouses) to perform under the terms of the contracts (credit risk). On any business day, an Authorized Participant may place an order with the Transfer Agent to redeem one or more blocks of 100,000 Shares ("Creation Units"). Redemption orders must be placed by10:00 a.m., Eastern Time . The day on which the Managing Owner receives a valid redemption order is the redemption order date. The day on which a redemption order is settled is the redemption order settlement date. As provided below, the redemption order settlement date may occur up to two business days after the redemption order date. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Creation Units. Individual Shareholders may not redeem directly from the Fund. Instead, individual Shareholders may only redeem Shares in integral multiples of 100,000 and only through an Authorized Participant. Unless otherwise agreed to by the Managing Owner and the Authorized Participant as provided in the next sentence, by placing a redemption order, an Authorized Participant agrees to deliver the Creation Units to be redeemed through DTC's book-entry system to the Fund no later than the redemption order settlement date as of2:45 p.m., Eastern Time , on the business day immediately following the redemption order date. Upon submission of a redemption order, the Authorized Participant may request the Managing Owner to agree to a redemption order settlement date up to two business days after the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant's DTC account is charged the non-refundable transaction fee due for the redemption order. Redemption orders may be placed either (i) through the Continuous Net Settlement ("CNS") clearing processes of theNational Securities Clearing Corporation (the "NSCC") (the "CNS Clearing Process") or (ii) if outside the CNS Clearing Process, only through the facilities ofThe Depository Trust Company ("DTC" or the "Depository") (the "DTC Process"), or a successor depository, and only in exchange for cash. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant's DTC account is charged the non-refundable transaction fee due for the redemption order and such fee is not borne by the Fund. Capital Resources
The Fund does not have any material commitments for capital expenditures as of the end of the latest fiscal period.
The Fund is unaware of any (i) anticipated known demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a material effect on operations. Cash Flows A primary cash flow activity of the Fund is to raise capital from Authorized Participants through the issuance of Shares. This cash is used to invest inUnited States Treasury Obligations, money market mutual funds and T-Bill ETFs, if any, and to meet margin requirements as a result of the positions taken in futures contracts to match the fluctuations of the Index. 25 -------------------------------------------------------------------------------- As of the date of this Report, each ofBMO Capital Markets Corp. ,BNP Paribas Securities Corp. ,Cantor Fitzgerald & Co. ,Citadel Securities LLC ,Citigroup Global Markets Inc. ,Credit Suisse Securities (USA) LLC ,Deutsche Bank Securities Inc. ,Goldman Sachs & Co. ,Goldman Sachs Execution & Clearing LP ,Interactive Brokers LLC ,Jefferies LLC ,JP Morgan Securities Inc. ,Merrill Lynch Professional Clearing Corp. ,Morgan Stanley & Co. LLC ,Nomura Securities International Inc. ,RBC Capital Markets LLC ,SG Americas Securities LLC ,UBS Securities LLC ,Virtu Americas LLC andVirtu Financial Capital Markets LLC has executed a Participant Agreement and are the only Authorized Participants.
Operating Activities
Net cash flow provided by (used in) operating activities was$(33.5) million and$728.8 million for the years endedDecember 31, 2020 and 2019, respectively. These amounts primarily include net income (loss), net purchases and sales of money market mutual funds and net purchases and sales of United States Treasury Obligations and affiliated investments. The Fund invests inUnited States Treasury Obligations, money market mutual funds and T-Bill ETFs (affiliated or otherwise), if any, for margin and/or cash management purposes. While the Fund's performance reflects the appreciation and depreciation of those holdings, the Fund's performance, whether positive or negative, is driven primarily by its strategy of trading futures contracts with the aim of seeking to track the Index. During the year endedDecember 31, 2020 ,$1,258.8 million was paid to purchase United States Treasury Obligations and$1,527.0 million was received from sales and maturing United States Treasury Obligations. During the year endedDecember 31, 2019 ,$3,654.7 million was paid to purchase United States Treasury Obligations and$4,633.2 million was received from sales and maturing United States Treasury Obligations.$2,268.5 million was received from sales of affiliated investments and$2,391.2 million was paid to purchase affiliated investments during the year endedDecember 31, 2020 .$3,261.5 million was received from sales of affiliated investments and$3,634.0 million was paid to purchase affiliated investments during the year endedDecember 31, 2019 . Unrealized appreciation/depreciation on United States Treasury Obligations, affiliated investments and futures contracts increased (decreased) Net cash provided by (used in) operating activities by$(22.9) million and$(34.7) million during the years endedDecember 31, 2020 and 2019, respectively.
Financing Activities
The Fund's net cash flow provided by (used in) financing activities was$41.1 million and$(728.8) million during the years endedDecember 31, 2020 and 2019, respectively. This included$483.4 million and$120.2 million from Shares purchased by Authorized Participants and$442.3 million and$807.3 million from Shares redeemed by Authorized Participants during the years endedDecember 31, 2020 and 2019, respectively. There were no changes in amounts due to the Custodian for the year endedDecember 31, 2020 . During the year endedDecember 31, 2019 , amounts due to the Custodian decreased by$19.0 million . No distributions were paid to Shareholders during the year endedDecember 31, 2020 . During the year endedDecember 31, 2019 , distributions paid to Shareholders were$22.7 million . Results of Operations
FOR THE YEARS ENDED
The following graphs illustrate the percentage changes in (i) the market price
of the Shares (as reflected by the line "Market"), (ii) the Fund's NAV (as
reflected by the line "NAV"), and (iii) the closing levels of the Index (as
reflected by the line "DBIQ Opt Yield Diversified Comm Index ER"). Whenever the
Treasury Income, Money Market Income and T-Bill ETF Income, if any, earned by
the Fund exceeds Fund expenses, the price of the Shares generally exceeds the
level of the Index primarily because the Share price reflects Treasury Income,
Money Market Income and T-Bill ETF Income from the Fund's collateral holdings
whereas the Index does not consider such income. There can be no assurances that
the price of the Shares or the Fund's NAV will exceed the Index levels.
No representation is being made that the Index will or is likely to achieve
closing levels consistent with or similar to those set forth herein. Similarly,
no representation is being made that the Fund will generate profits or losses
similar to the Fund's past performance or changes in the Index closing levels.
26
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COMPARISON OF MARKET, NAV AND DBIQ OPTIMUM YIELD DIVERSIFIED COMMODITY INDEX ER
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
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NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES,
POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND'S FUTURE
PERFORMANCE.
[[Image Removed]]
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES,
POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND'S FUTURE
PERFORMANCE.
27
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Performance Summary This Report covers the years endedDecember 31, 2020 and 2019. For a performance discussion related to the year endedDecember 31, 2018 , see the annual report for the year endedDecember 31, 2018 available at http://www.invesco.com/ETFs.
Past performance of the Fund is not necessarily indicative of future performance.
The Index is intended to reflect the change in market value of theIndex Commodities . In turn, the notional amounts of each Index Commodity are broadly in proportion to historic levels of the world's production and stocks of suchIndex Commodities . The DBIQ Optimum Yield Diversified Commodity Index Total Return ™, (the "DBIQ-OY Diversified TR™") consists of the Index plus 3-month United States Treasury Obligations returns. Past results of the Index and the DBIQ-OY Diversified TRTIM are not necessarily indicative of future changes, positive or negative. The section "Summary of the DBIQ-OY Diversified TR™ and Underlying Index Commodity Returns for the years endedDecember 31, 2020 and 2019" below provides an overview of the changes in the closing levels of the DBIQ-OY Diversified TR™ by disclosing the change in market value of each underlying component Index Commodity through a "surrogate" (and analogous) index that also reflects 3-month United States Treasury Obligations returns. Please note also that the Fund's objective is to track the Index (not the DBIQ-OY Diversified TR™), and the Fund does not attempt to outperform or underperform the Index. The Index employs the optimum yield roll method with the objective of mitigating the negative effects of contango, the condition in which distant delivery prices for futures exceed spot prices, and maximizing the positive effects of backwardation, a condition opposite of contango. Summary of the DBIQ-OY Diversified TR™ and Underlying Index Commodity Returns for the Years Ended December 31, 2020 and 2019 AGGREGATE RETURNS FOR INDICES IN THE DBIQ-OY DIVERSIFIED TR™ Years Ended December 31, Underlying Index 2020 2019 DB Light Crude Oil Indices (20.29 )% 30.07 % DB Ultra Low Sulphur Diesel Indices (42.57 ) 22.00 DB Aluminum Indices 2.92 (3.77 ) DB Gold Indices 22.40 17.94 DB Corn Indices (2.24 ) 0.95 DB Wheat Indices 5.61 2.71 DB RBOB Gasoline Indices (15.18 ) 28.33 DB Natural Gas Indices (16.20 ) (13.78 ) DB Silver Indices 45.49 13.65 DB Zinc Indices 19.73 (3.19 ) DB Copper Grade A Indices 24.29 4.68 DB Soybeans Indices 22.18 1.56 DB Sugar Indices (1.85 ) (1.18 ) DB Brent Crude Oil Indices (28.41 ) 25.40 AGGREGATE RETURNS (7.53 )% 12.94 % If the Fund's Treasury Income, Money Market Income and T-Bill ETF Income were to exceed the Fund's fees and expenses, the aggregate return on an investment in the Fund would be expected to outperform the Index and underperform the DBIQ-OY Diversified TR™. The only difference between (i) the Index (the "Excess Return Index") and (ii) the DBIQ-OY Diversified TR™ (the "Total Return Index") is that the Excess Return Index does not include interest income from fixed income securities while the Total Return Index does include such a component. Thus, the difference between the Excess Return Index and the Total Return Index is attributable entirely to the interest income attributable to the fixed income securities reflected in the Total Return Index. The Total Return Index does not actually hold any fixed income securities. If the Fund's Treasury Income, Money Market Income and T-Bill ETF Income, if any, exceeds the Fund's fees and expenses, then the amount of such excess is expected to be distributed periodically. The market price of the Shares is expected to closely track the Excess Return Index. The aggregate return on an investment in the Fund over any period is the sum of the capital appreciation or depreciation of the Shares over the period, plus the amount of any distributions during the period. Consequently, the Fund's aggregate return is expected to outperform the Excess Return Index by the amount of the excess, if any, of the Fund's Treasury Income, Money Market Income and T-Bill ETF Income over its fees and expenses. As a result of the Fund's fees and expenses, however, the aggregate return on the Fund is expected to underperform the Total Return Index. If the Fund's fees and expenses were to exceed the Fund's Treasury Income, Money Market Income and T-Bill ETF Income, if any, the aggregate return on an investment in the Fund is expected to underperform the Excess Return Index 28 --------------------------------------------------------------------------------
FOR THE YEARS ENDED
Fund Share Price Performance
For the year endedDecember 31, 2020 , the NYSE Arca market value of each Share decreased from$15.96 per Share to$14.70 per Share. The Share price low and high for the year endedDecember 31, 2020 and related change from the Share price onDecember 31, 2019 was as follows: Shares traded at a low of$10.52 per Share (-34.10%) onApril 27, 2020 , and a high of$16.19 per Share (+1.44%) onJanuary 7, 2020 . No distributions were paid to Shareholders during the year endedDecember 31, 2020 . Therefore, the total return for the Fund on a market value basis was -7.89%. For the year endedDecember 31, 2019 , the NYSE Arca market value of each Share increased from$14.51 per Share to$15.96 per Share. The Share price low and high for the year endedDecember 31, 2019 and related change from the Share price onDecember 31, 2018 was as follows: Shares traded at a low of$14.53 per Share (+0.14%) onJanuary 2, 2019 , and a high of$16.35 per Share (+12.69%) onApril 10, 2019 . OnDecember 31, 2019 , the Fund paid a distribution of$0.25383 for each General Share and Share to holders of record as ofDecember 24, 2019 . Therefore, the total return for the Fund on a market value basis was +11.75%.
Fund Share Net Asset Performance
For the year endedDecember 31, 2020 , the NAV of each Share decreased from$15.94 per Share to$14.66 per Share. Falling commodity futures contracts prices for Light Crude Oil, Ultra Low Sulphur Diesel, Corn, RBOB Gasoline, Natural Gas, Sugar and Brent Crude Oil were partially offset by rising commodity futures contracts prices for Aluminum, Gold, Wheat, Silver, Zinc, Copper Grade A and Soybeans during the year endedDecember 31, 2020 , contributing to an overall 7.87% decrease in the level of the Index and to a 7.53% decrease in the level of the DBIQ-OY Diversified TR™. No distributions were paid to Shareholders during the year endedDecember 31, 2020 . Therefore, the total return for the Fund on a NAV basis was -8.03%. Net income (loss) for the year endedDecember 31, 2020 was$(128.4) million , primarily resulting from$6.2 million of income, net realized gain (loss) of$(227.3) million , net change in unrealized gain (loss) of$101.1 million and net operating expenses of$8.3 million . For the year endedDecember 31, 2019 , the NAV of each Share increased from$14.44 per Share to$15.94 per Share. Rising commodity futures contracts prices for Light Crude Oil, Ultra Low Sulphur Diesel, Gold, Corn, Wheat, RBOB Gasoline, Silver, Copper Grade A, Soybeans and Brent Crude Oil, were partially offset by falling commodity futures contracts prices for Aluminum, Natural Gas, Zinc and Sugar during the year endedDecember 31, 2019 , contributing to an overall 10.60% increase in the level of the Index and to a 12.94% increase in the level of the DBIQ-OY Diversified TR™. OnDecember 31, 2019 , the Fund paid a distribution of$0.25383 for each General Share and Share to holders of record as ofDecember 24, 2019 . Therefore, the total return for the Fund on a NAV basis was +12.16%. Net income (loss) for the year endedDecember 31, 2019 was$206.0 million , primarily resulting from$36.3 million of income, net realized gain (loss) of$(108.3) million , net change in unrealized gain (loss) of$292.0 million and net operating expenses of$14.0 million .
Critical Accounting Policies
The Fund's critical accounting policies are as follows:
Preparation of the financial statements and related disclosures in conformity withU.S. GAAP requires the application of appropriate accounting rules and guidance, as well as the use of estimates, and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense and related disclosure of contingent assets and liabilities during the reporting period of the financial statements and accompanying notes. The Fund's application of these policies involves judgments and actual results may differ from the estimates used. There were no significant estimates used in the preparation of these financial statements. Commodity futures contracts, United States Treasury Obligations, T-Bill ETFs and money market mutual funds are recorded on a trade date basis and at fair value in the financial statements, with changes in fair value, if any, reported in the Statements of Income and Expenses. The use of fair value to measure financial instruments, with related unrealized gains or losses recognized in earnings in each period, is fundamental to the Fund's financial statements. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). United States Treasury Obligations are fair valued using an evaluated quote provided by an independent pricing service. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day NAV per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Financial 29 -------------------------------------------------------------------------------- Accounting Standards Board ("FASB") Accounting Standards Codification for fair value measurement and disclosure guidance requires a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 6 within the financial statements in Item 8 for further information. Securities for which market quotations are not readily available or became unreliable are valued at fair value as determined in good faith following procedures approved by the Managing Owner. Issuer-specific events, market trends, bid/asked quotes of brokers and information providers and other data may be reviewed in the course of making a good faith determination of a security's fair value. Realized gains (losses) from the sale or disposition of securities or derivatives are determined on a specific identification basis and recognized in the Statements of Income and Expenses in the period in which the contract is closed or the sale or disposition occurs, respectively.
Interest income on United States Treasury Obligations is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United States Treasury Obligations. Dividend income (net of withholding tax, if any) is recorded on the ex-dividend date.
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of its business, the Fund is a party to financial instruments with off-balance sheet risk. The term "off-balance sheet risk" refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in a future obligation or loss. The financial instruments used by the Fund are commodity futures, the values of which are based upon an underlying asset and generally represent future commitments which have a reasonable possibility to be settled in cash or through physical delivery. The financial instruments are traded on an exchange and are standardized contracts. The Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements entered into in the normal course of business noted above, which may include indemnification provisions related to certain risks service providers undertake in providing services to the Fund. While the Fund's exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Fund's financial position. The Managing Owner expects the risk of loss relating to indemnification to be remote. The Fund has financial obligations to the Managing Owner and the Commodity Broker under the Trust Agreement and its agreement with the Commodity Broker (the "Commodity Broker Agreement"), respectively. Management Fee payments made to the Managing Owner, pursuant to the Trust Agreement, are calculated as a fixed percentage of the Fund's NAV. Commission payments to the Commodity Broker, pursuant to the Commodity Broker Agreement, are on a contract-by-contract, or round-turn, basis. As such, the Managing Owner cannot anticipate the amount of payments that will be required under these arrangements for future periods as NAVs and trading activity will not be known until a future date. The Fund's agreement with the Commodity Broker may be terminated by either party for various reasons. All Management Fees and commission payments are paid to the Managing Owner and the Commodity Broker, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
The Fund is designed to track the performance of the Index. The market sensitive instruments held by it are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund's main line of business.
Market movements can produce frequent changes in the fair market value of the Fund's open positions and, consequently, in its earnings and cash flow. The Fund's market risk is primarily influenced by changes in the prices of commodities.
Standard of Materiality
Materiality as used in this section, "Quantitative and Qualitative Disclosures
About Market Risk," is based on an assessment of reasonably possible market
movements and the potential losses caused by such movements, taking into account
the effects of margin, and any other multiplier features, as applicable, of the
Fund's market sensitive instruments.
30
--------------------------------------------------------------------------------QUANTIFYING THE FUND'S TRADING VALUE AT RISK
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund's market risk
exposures contain "forward-looking statements" within the meaning of the safe
harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the Exchange
Act). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor, except for
statements of historical fact (such as the dollar amount of maintenance margin
required for market risk sensitive instruments held at the end of the reporting
period).
Value at Risk ("VaR") is a statistical measure of the value of losses that would
not be expected to be exceeded over a given time horizon and at a given
probability level arising from movement of underlying risk factors. Loss is
measured as a decline in the fair value of the portfolio as a result of changes
in any of the material variables by which fair values are determined. VaR is
measured over a specified holding period (one day) and to a specified level of
statistical confidence (99th percentile). However, the inherent uncertainty in
the markets in which the Fund trades and the recurrence in the markets traded by
the Fund of market movements far exceeding expectations could result in actual
trading or non-trading losses far beyond the indicated VaR or the Fund's
experience to date (i.e., "risk of ruin"). In light of these considerations, as
well as the risks and uncertainties intrinsic to all future projections, the
following VaR presentation does not constitute any assurance or representation
that the Fund's losses in any market sector will be limited to VaR.
THE FUND'S TRADING VALUE AT RISK
The Fund calculates VaR using the actual historical market movements of the Fund's net assets.
The following table indicates the trading VaR associated with the Fund's net
assets as of
For the Year Ended
December 31, 2020
VaR* Number of times
Description Net Assets Daily Volatility (99 Percentile) VaR ExceededInvesco DB Commodity Index Tracking Fund$ 1,341,324,637 1.17 %$ 36,647,890 24
The following table indicates the trading VaR associated with the Fund's net
assets as of
For the Year Ended
December 31, 2019
VaR* Number of times
Description Net Assets Daily Volatility (99 Percentile) VaR Exceeded
Invesco DB Commodity Index
Tracking Fund $ 1,428,657,083 0.76 % $ 25,370,657 11
* The VaR represents the one day downside risk, under normal market conditions,
with a 99% confidence level. It is calculated using historical market moves
of the Fund's net assets and uses a one year look back.
THE FUND'S NON-TRADING MARKET RISK
The Fund has non-trading market risk as a result of investing in short-term United States Treasury Obligations, T-Bill ETFs and money market mutual funds. The market risk represented by these investments is not expected to be material. Although the Fund purchases and sells shares of T-Bill ETFs on an exchange, it does not establish or liquidate those positions for trading purposes.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING MARKET RISK EXPOSURES
The following qualitative disclosures regarding the Fund's market risk
exposures-except for those disclosures that are statements of historical
fact-constitute forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. The Fund's primary
market risk exposures are subject to numerous uncertainties, contingencies and
risks. Government interventions, defaults and expropriations, illiquid markets,
the emergence of dominant fundamental factors, political upheavals, changes in
historical price relationships, an influx of new market participants, increased
regulation and many other factors could result in material losses as well as in
material changes to the risk exposures of the Fund. The Fund's current market
exposure may change materially. Investors may lose all or substantially all of
their investment in the Fund.
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The following were the primary trading risk exposures of the Fund as of
ENERGY
Light Sweet Crude Oil
The price of light sweet crude oil is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for light sweet crude oil. In addition, various other factors can affect the demand for light sweet crude oil, such as weather, political events and labor activity. The supply of light sweet crude oil can be affected by many events, in particular, the meetings of theOrganization of Petroleum Exporting Countries . Market expectations about events that will influence either demand or supply can cause prices for light sweet crude oil to fluctuate greatly. A significant amount of the world oil production capacity is controlled by a relatively small number of producers. Any large change in production by one of these producers could have a substantial effect on the price of light sweet crude oil.
Ultra Low Sulphur Diesel (also commonly known as Heating Oil)
The price of Ultra Low Sulphur Diesel is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for Ultra Low Sulphur Diesel. In addition, the seasonal temperatures in countries throughout the world can also heavily influence the demand for Ultra Low Sulphur Diesel. Ultra Low Sulphur Diesel is derived from crude oil and as such, any factors that influence the supply of crude oil may also influence the supply of Ultra Low Sulphur Diesel. Brent Crude Oil The price of Brent Crude Oil is volatile and is affected by numerous factors. The price of Brent Crude Oil is influenced by many factors, including, but not limited to, the amount of output by oil producing nations, worldwide supply/stockpiles, weather, various geopolitical factors that cause supply disruptions (e.g., war, terrorism), global demand (particularly from emerging nations), currency fluctuations, and activities of market participants such as hedgers and speculators. RBOB Gasoline The price of RBOB Gasoline is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for RBOB Gasoline. In addition, the demand has seasonal variations, which occur during "driving seasons" usually considered the summer months inNorth America andEurope . RBOB Gasoline is derived from crude oil and as such, any factors that influence the supply of crude oil may also influence the supply of RBOB Gasoline.
Natural Gas
The price of natural gas is volatile and is affected by numerous factors. The level of global industrial activity influences the demand for natural gas. In addition to the seasonal temperatures in countries throughout the world, any fluctuations in temperature may also heavily influence the demand for natural gas. METALS Gold The price of gold is volatile and is affected by numerous factors. Gold prices float freely in accordance with supply and demand. The price movement of gold may be influenced by a variety of factors, including announcements from central banks regarding reserve gold holdings, agreements among central banks, purchases and sales of gold by central banks, other governmental agencies that hold large supplies of gold, political uncertainties, economic concerns such as an increase or decrease in confidence in the global monetary system, the relative strength of theU.S. dollar, interest rates and numerous other factors. Gold prices may also be affected by industry factors such as industrial and jewelry demand.
Silver
The price of silver is volatile and is affected by numerous factors. The largest industrial users of silver (e.g., photographic, jewelry, and electronic industries) may influence its price. A change in economic conditions, such as a recession, can adversely affect industries which are dependent upon the use of silver. In turn, such a negative economic impact may decrease demand for silver, and, consequently, its price. Worldwide speculation and hedging activity by silver producers may also impact its price.
Aluminum
The price of aluminum is volatile. The price movement of aluminum may be
influenced by a variety of factors, including the level of global industrial
activity and demand, especially relating to the transportation, packaging and
building sectors, each of which significantly influences the demand, and in
turn, the price of aluminum. Prices for aluminum are influenced by a number of
factors including the level of economic activity in large aluminum consuming
markets, political uncertainties, economic concerns and the rate
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of supply of new metal from producers. The production of aluminum is a power
intensive process that requires large amounts of inexpensive power. Disruptions
in the amount of energy available to aluminum producers could affect the supply
of aluminum.
Zinc
The price of zinc is volatile and is affected by numerous factors. The price of
zinc is primarily affected by the global demand for and supply of zinc. Demand
for zinc is significantly influenced by the level of global industrial economic
activity. The galvanized steel industrial sector is particularly important given
that the use of zinc in the manufacture of galvanized steel accounts for
approximately 50% of world-wide zinc demand. The galvanized steel sector is in
turn heavily dependent on the automobile and construction sectors. An
additional, but highly volatile component of demand, is adjustments to inventory
in response to changes in economic activity and/or pricing levels. The supply of
zinc concentrate (the raw material) has generally been dominated by China ,
Australia , North America and Latin America . The supply of zinc is also affected
by current and previous price levels, which will influence investment decisions
in new mines and smelters. It is not possible to predict the aggregate effect of
all or any combination of these factors.
Copper
The price of copper is volatile. The price of copper is primarily affected by the global demand for and supply of copper. Demand for copper is significantly influenced by the level of global industrial economic activity. Industrial sectors which are particularly important include the electrical and construction sectors. In recent years demand has been supported by strong consumption from newly industrializing countries, which continue to be in a copper-intensive period of economic growth as they develop their infrastructure (such asChina ). An additional, but highly volatile, component of demand is adjustments to inventory in response to changes in economic activity and/or pricing levels. Apart fromthe United States ,Canada andAustralia , the majority of copper concentrate supply (the raw material) comes from outside theOrganization for Economic Cooperation and Development countries.Chile is the largest producer of copper concentrate. In previous years, copper supply has been affected by strikes, financial problems, political turmoil and terrorist activity.
AGRICULTURAL
Corn
The price of corn is volatile. The price movement of corn may be influenced by three primary supply factors: farmer planting decisions, climate, and government agricultural policies and three major market demand factors: livestock feeding, shortages or surpluses of world grain supplies, and domestic and foreign government policies and trade agreements. Additionally, the price movement of corn may be influenced by a variety of other factors, including weather conditions, disease, transportation costs, political uncertainties and economic concerns. Wheat The price of wheat is volatile. The price movement of wheat may be influenced by three primary supply factors: farmer planting decisions, climate, and government agricultural policies and three major market demand factors: food, shortages or surpluses of world grain supplies, and domestic and foreign government policies and trade agreements. Additionally, the price movement of wheat may be influenced by a variety of other factors, including weather conditions, disease, transportation costs, political uncertainties and economic concerns.
Soybeans
The price of soybeans is volatile. The price movement of soybeans may be influenced by a variety of factors, including demand, weather conditions, disease, crop production, transportation costs, political uncertainties and economic concerns.
Sugar
The price of sugar is volatile. The price movement of sugar may be influenced by a variety of factors, including demand, weather conditions, disease, crop production, transportation costs, political uncertainties and economic concerns.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING MARKET RISK EXPOSURE
As noted above, the Fund has non-trading market risk as a result of investing in short-term United States Treasury Obligations, T-Bill ETFs and money market mutual funds. The market risk represented by these investments is not expected to be material.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
Under ordinary circumstances, the Managing Owner's exercise of discretionary
power is limited to determining whether the Fund will make a distribution. Under
emergency or extraordinary circumstances, the Managing Owner's use of its
discretionary powers may increase. These special circumstances, for example,
include the unavailability of the Index or certain natural or manmade disasters.
The Managing Owner does not actively manage the Fund to avoid losses. The Fund
only takes long positions in investments and does not employ "stop-loss"
techniques.
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