The rising dollar and the Federal Reserve’s first interest rate hike of the year sent precious metals and the corresponding ETFs tumbling to end 2016.
However, oil and oil exchange traded products got a lift after the Organization of Petroleum Exporting Countries (OPEC) and other major oil-producing nations opted to lower output.
While a split scenario appears to be afoot for the broader commodities complex to start 2017, some commodities could generate upside for investors this year.
The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), which offers exposure to multiple commodities, was solid last year. Another name in the diversified commodities ETF group to consider is the iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG).
DBC currently features exposure to about 15 commodities. Those include heavily traded commodities such as gold, silver and West Texas Intermediate oil futures, as well as more obscure commodities fare such as sugar, wheat and zinc.
The iPath Bloomberg Coffee Subindex Total Return ETN (NYSEArca: JO) could be a tactical commodities trade for risk-tolerant traders this year. According to the International Coffee Organization, the coffee market saw demand exceed consumption in the two years ended September 30. For instance, Brazilians are likely to consume 3.2% more coffee in 2016, compared to its typical growth rate of about 1%.
Looking at JO, “you can see that the price has been trading sideways for much of 2015-16. Based on the extreme showing on the Volume by Price indicator, it appears as though the bulls and bears are at a stalemate near current levels. The slight shift higher puts the bias in favor of the bulls and based on the chart it looks as though the next stop could be in the mid-$30s sometime in 2017,” reports Investopedia.
Oil prices posted the best annual showing since the global financial crisis last year, but investors should look to limit the potentially erosive effects of contango.
To limit the negative effects of contango, investors may consider investing in futures-backed commodity ETFs with longer-dated contracts. For instance, the PowerShares DB Oil Fund (NYSEArca: DBO) and United States 12 Month Oil Fund (NYSEArca: USL) provide exposure to WTI oil but include a different weighting methodology to limit the negative effects of contango. DBO can include contracts as far out as 13 months and dump contracts at any point to maximize gains or minimize losses associated with the implied roll yield. USL, on the other hand, ladders 12 months of contracts to better control for backwardation and contango.
For more information on the commodities market, visit our commodity ETFs category.
