A Deep Dive Into an Equal-Weighted Commodity ETF
October 16th 2012 at 6:01am by Tom Lydon
The Greenhaven Continuous Commodity Index (NYSEArca: GCC) is a broad-based commodity exchange traded fund. The fund is unique because it equally allocates the same amount of exposure to 17 different commodities.
“Most broad commodities funds weight their portfolios by economic significance, a proxy for market cap, which results in an energy allocation that can go as high as 70%. When investors buy these energy-heavy funds, the returns of agriculture and metal commodities are diluted with a small relative weighting. Not so with GCC, which is more than 80% nonenergy commodities like corn, sugar, and platinum,” Abby Woodham wrote for Morningstar. [ETF Chart of the Day: Commodities]
GCC costs 0.85% plus 0.20% a year on brokerage fees, equaling 1.05%. The PowerShares DB Commodity Index Fund (NYSEArca: DBC) costs about 0.93%. In comparison, the iShares GSCI Commodity Indexed Trust Fund (NYSEArca: GSG) costs 0.75%. [Commodity ETFs: Beyond DBC]
GCC is a play on commodities for investors that think global demand for them will grow over the years and those that want diversification and a hedge against inflation. Commodities traditionally have has a low correlation to the stock market and the bond market. As of late, that theory has been tested, since the market crisis in 2008. However, since commodities are so readily available to retail investors, the correlation between the stock, bond and commodity market has become tighter, meaning they can move in step with one another. This negates the notion to invest in this sector for diversification reasons.
Commodities continue to provide investors with a place for investing capital in an area that will see growth over the coming years and still provide a hedge for inflation. Economic and population growth in the emerging markets will continue to place greater strain on ultimately limited supplies of the world’s natural resources. The U.N. projects an 11% global population increase by 2020 and a 20% increase by 2030, reports Woodham. [List of Top Commodity ETFs]
GCC and other commodity ETFs can provide a hedge against inflation as prices rise for things like gas, oil, corn and other commodities. By investing in focused funds, an investor can take advantage of the rising prices even if he or she relies upon the commodity.
Greenhaven Continuous Commodity Index
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.