Fed Fans Flame on Inverse Commodity ETFs

Weakening global growth and the strong U.S. dollar have weighed on demand for raw materials and pressured commodities-related exchange traded funds, with a major commodity index now trading near a 16-year low.

The broad commodities market has been trending lower. Year-to-date, the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) dipped 17.8%, PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) fell 21.3%, iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) declined 24.4% and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) dropped 26.4%. [Expect a Prolonged Slump in Commodity ETFs]

The Bloomberg Commodity Index, which tracks the performance of 22 natural resources, has declined two-thirds from its peak and is hovering near its lowest level since 1999, reports Kevin Crowley for Bloomberg.

Meanwhile, inverse ETFs that hedge against falling commodities have surged this year. For instance, the DB Commodity Short ETN (NYSEArca: DDP), which takes the simple short position on a group of diversified commodities, gained 18.1% year-to-date. The DB Commodity Double Short ETN (NYSEArca: DEE), which takes the two times the inverse position on a basket of commodities, jumped 49.3%. The ProShares UltraShort Bloomberg Commodity (NYSEArca: CMD) also takes the daily -2x or -200% performance of the Bloomberg Commodity Index, advanced 51.3%.

Sapping the strength out of so-called commodity super cycle, China’s demand for raw materials has waned as the Chinese economy slows to its weakest pace in 25 years.

“In China, you had 1.3 billion people industrializing – something on that scale has never been seen before,” Andrew Lapping, deputy chief investment officer at Allan Gray Ltd., told Bloomberg. “But there’s just no way that can continue indefinitely. You can only consume so much.”

Additionally, the Federal Reserve is expected to hike interest rates, which will strengthen the dollar and further weigh on USD-denominated commodities for foreign buyers. For investors, the non-yielding commodities will also become less attractive than other income-generating assets like bonds and equities.