Commodity ETNs in the Limelight
June 30th, 2014 at 1:52pm by Tom Lydon
The commodities market and related exchange traded notes have been outperforming a slew of broad asset classes this year as investors turned to hard assets for diversifying their portfolios.
The Dow Jones-UBS Commodity Index, which follows 21 commodities, rose 8.1% this year, outperforming broad U.S. equities, 10-year Treasury bonds and high-yield corporate debt, reports Neil Hume for Financial Times. [Gold, Silver ETFs Pleasantly Surprised in June]
The related iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) has increased 8.4% year-to-date, while the UBS ETRACS DJ-UBS Commodity Index Total Return ETN (NYSEArca: DJCI) gained 8.2%. DJP has $1.7 billion in assets under management and comes with a 0.75% expense ratio. DJCI is slightly smaller at $136.4 million in assets, but it shows a cheaper 0.50% expense ratio. [Demand Soars for Energy ETFs]
After the financial downturn, commodities were caught up in broad moves, mirroring market turns and losing their diversification benefits. However, investor sentiment for commodities has improved this year. More are looking at commodities as a diversifier for a balanced portfolio, with traders seeing lower correlation between commodities and other asset classes.
“The diversification benefits of commodities have started to resonate with investors as correlations between commodities and other asset classes broke down,” Tom Kendall, head of global commodities research at Credit Suisse, said in the FT article.
As the correlation between commodities and other assets breaks down, the hard assets can trade based on fundamentals, like seasonal supply and demand.
Additionally, commodity returns have benefited from increased “backwardation” in the futures markets where prices for near-term futures contracts are above later-dated contracts. The downward slope means investors profit when rolling futures contracts that are about to expire, essentially selling high and buying low.
Looking ahead, in a Credit Suisse survey of large investors and mutual funds, 42% of respondents said they were overweight commodities over the coming 12 months, compared to 19% last year for the same period.
“If intentions translate into action, the next 12 months could be much more positive than the proceeding twelve,” Credit Suisse said in a recent report.
For more information on the commodities market, visit our commodity ETFs category.
Max Chen 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.