With the U.S. dollar strengthening and global growth concerns lingering, the commodities market have stumbled. Nevertheless, traders can still find some opportunities, but they will have to target single commodity-specific exchange traded funds.
The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest commodity-related ETF and tracks a broad basket of the 14 most heavily traded commodities, has declined 12.6% over the past three months. Meanwhile, the iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG), which includes a broader group of 24 commodities, has decreased 13.5%.
Citigroup analysts attribute the commodities’ poor performance to a “trifecta” of factors, including rising supply and diminished demand for oil, expectations for a bumper crop harvest in the northern hemisphere, and a surging U.S. dollar, reports Neil Hume for Financial Times.
Over the past three months, the United States Brent Oil Fund (NYSEArca: BNO) declined 18.7% while the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil, fell 14.8%. [Saudi Arabia’s Ambitions Keep Pressure On Oil ETFs]
U.S. farmers are harvesting a bumper crop year, with record corn and soybean crops. The Teucrium Corn Fund (NYSEArca: CORN) and the Teucrium Soybean Fund (NYSEArca: SOYB) are off 20.4% and 13.2%, respectively, year-to-date. [Record Harvests Chase Investors From Agriculture ETPs]
Meanwhile, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, gained 6.6% over the past three months. A stronger dollar makes USD-denominated commodities more expensive for foreign buyers, specifically gold and other precious metals. The SPDR Gold Shares (NYSEArca: GLD) has dropped 8.0% over the past three months.
While investors still want commodity exposure for their diversification qualities, some are beginning to take a more pick-and-choose approach.
“Investors still want long commodity exposure but, despite the return of diversification benefits from commodities, are viewing this asset class increasingly with an absolute return bias,” Kamal Naqvi of Credit Suisse said in the article. “I think we could or should see much more concentrated exposure to individual commodities, recognising that this is much more a ‘stock pickers’ environment.”
For instance, coffee and cocoa have been among the best performing commodities this year. The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) has jumped 95.2% year-to-date on drought concerns in Brazil, the world’s largest supplier of coffee beans. Additionally, the iPath DJ-UBS Cocoa TR Sub-Index ETN (NYSEArca: NIB) has increased 12.8% year-to-date on rising emerging market demand and supply concerns out of the Ivory Coast.
“In this type of environment, active management – being long/short and relative value – is the only way,” Aakash Doshi, analyst at Citi, said in the article. “We are not in a commodities super cycle any more.”
ETF traders can also hedge further weakness in the commodities space with inverse exchange traded products. For example, the PowerShares DB Commodity Short ETN (NYSEArca: DDP) has increased 75.5% year-to-date.
For more information on the commodities market, visit our commodity ETFs category.
Full disclosure: Tom Lydon’s clients own shares of GLD.