Many commodities are struggling to generate positive returns this year and that is particularly true of energy commodities, including oil and natural gas. Investors looking to position for a commodities rebound with exchange traded funds may want to consider those funds with broad-based exposure rather than a product emphasizing a single commodity.
The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related ETF, can help investors get commodities diversification. DBC, which has $1.95 billion in assets under management, follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return.
DBC “is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world,” according to PowerShares.
Oil plays a pivotal role in DBC’s price action.
“Investors are now presented with the best buying opportunity in energy commodities since before the production-cutting agreement last November among members of the Organization of the Petroleum Exporting Countries (OPEC),” said PowerShares in a recent note. “As I have often said, when it comes to crude oil prices, it’s all about supply. Global demand has shown a consistent trend for 25 years. But when sentiment is shaky, it doesn’t take much to squeeze wary investors from the market. And, true to form, some wary market participants have grown impatient with the delay in the drawdown of US crude oil inventories.”
While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
Various oil exposures account for about a quarter of DBC’s weight. OPEC output has declined for several straight months while Russia, the largest non-OPEC producer, has been trimming production since late 2016. Yet, oil prices continue sliding, proving the point that U.S. production is contributing to lower prices.
“Energy speculators have been highly focused on US crude oil reserves, and many lost patience while the markets rebalanced in Europe and Asia. A roughly 5% sell-off in West Texas Intermediate crude on May 4 had all the hallmarks of a capitulation in a market where sentiment has grown shaky,” said PowerShares.
If commodity traders fear that the weakness will persist, there are a number of inverse ETFs that hedge against falling commodities. For instance, the DB Commodity Short ETN (NYSEArca: DDP) takes the simple short position on a group of diversified commodities. The DB Commodity Double Short ETN (NYSEArca: DEE) takes the two times the inverse position on a basket of commodities.
For more information on the commodities market, visit our commodity ETFs category.