Broad commodity ETFs have rallied since mid-June. While the $6.7 billion PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) has attracted its fair share of interest, traders may also consider alternative fund strategies.
Commodity ETFs provide an added diversification quality to any portfolio. Commodities have historically maintained low correlations to stocks and bonds and have shown high correlations to inflation. [Commodities]
The PowerShares DB Commodity Index Tracking Fund follows the DBIQ Optimum Yield Divirsified Commodity Index Excess Return Index, which is comprised of futures contracts for 14 different commodities. The ETF has a 0.85% expense ratio.
DBC provides exposure to aluminum 4.2%, Brent crude 12.4%, copper 4.2%, corn 5.6%, gold 8.0%, heating oil 12.4%, light crude 12.4%, natural gas 5.5%, RBOB gasoline 12.4%, silver 2.0%, soybeans 5.6%, sugar 5.6%, wheat 5.6% and zinc 4.2%.
Futures-based ETFs have to roll contracts to avoid physical delivery of the commodity. If the later-dated contracts are more expensive than the spot price, or the market is in a state of “contango,” the ETF would lose money when rolling contracts. ETFs, though, would benefit if the market is in “backwardation” as the funds would profit from selling a contract that is about to expire for a cheaper, later-dated contract. [Backwardation and Contango]
Other commodity exchange-traded products include:
The GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) tries to reflect the performance of the Thomson Reuters Equal Weight Continuous Commodity Total Return Index, which is an equal-weight index of 17 commodities that are averaged across the futures curve six months out – by averaging the futures curve, the index tries to limit the effects of backwardation and contango. The ETF has a 0.85% expense ratio.
GCC futures holdings include natural gas, crude oil, heating oil, platinum, gold, silver, copper, corn, wheat soybeans, live cattle, lean hogs, coffee, cocoa, sugar, cotton and orange juice. Group allocations include softs 29%, metals 24%, agriculture 29% and energy 18%.
The iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) follows the iShares S&P GSCI Total Return Index, which is comprised of 24 commodities and is weighted according to the five-year average global production. In contrast to other funds, GSG utilizes five-year contracts, or CERFs, which helps limit transaction costs. The fund has a 0.75% expense ratio.
GSG’s commodity allocations include energy 68.8%, agriculture 16.7%, industrial metals 6.6%, livestock 4.4% and precious metals. 3.6%.
The United States Commodity Index Fund (NYSEArca: USCI) tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return, which rebalances monthly to hold 14 futures contracts from a list of 27 possible candidates. The ETF singles out the seven most heavily backwardated commodities and seven with the largest annual price change – all six commodity sectors will be represented. USCI has an expense ratio of 0.95%.