Commodities-based exchange traded funds (ETFs) have been doing well lately, but they can be intimidating to investors because of their contango and backwardation issues. In July of this year, the oil market switched from contango to backwardation, which was wonderful news for commodities investors, says Matt Hougan for Index Universe. What’s interesting is that even though oil is in backwardation, most of the other commodities are in contango.
So there are three major commodity indexes tracked by ETFs or ETNs: the GSCI, which is tracked by iShares S&P GSCI Commodity-Indexed Trust (GSG) and iPath S&P GSCI Total Return Index ETN (GSP); the DBC, which is tracked by PowerShares DB Commodity Index Tracking Fund (DBC); and the DJ-AIG, which is tracked by iPath Dow Jones-AIG Commodity Index ETN (DJP). Those three indexes hold wildly different positions in energy components: GSCI at 71%, DBC at 55% and DJ-AIG at 33%. And even within energy, the positions vary. For investors in GSG, DBC or DJP, these differences are crucial. GSG has the most exposure to backwardation, DBC is in the middle and DJP is currently exposed to contango.
What this boils down to is that currently, GSG and GSP are in the lead year-to-date:
- iPath S&P GSCI Total Return Index ETN (GSP) – up 18.3%
- iShares S&P GSCI Commodity-Indexed Trust (GSG) – up 18.2%
- PowerShares DB Commodity Index Tracking Fund (DBC) – up 13.9%
- iPath Dow Jones-AIG Commodity Index ETN (DJP) – up 9.2%
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.