Why Commodities ETFs Can Deliver More Upside

The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related exchange traded fund, is on firm footing while the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the exchange traded fund proxy for the U.S. Dollar Index (DXY), continues scuffling.

The weak dollar is seen as just one of several catalysts that could propel commodities exchange traded products higher this year. DBC tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which “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.

Commodities currently on DBC’s roster include West Texas Intermediate oil, Brent crude, gasoline, gold, silver, wheat, soybeans, corn, natural gas, sugar, aluminum, zinc and copper.

“A weak US dollar can also provide a tailwind to commodities,” said Invesco in a recent note. “This is because most major commodities are priced in US dollars. When the dollar falls in a broad fashion against other currencies around the world, commodities tend to rise in US dollar terms. And because the borrowings of many emerging market countries are also denominated in US dollars, a weak dollar can reduce the debt burden of these economies.”

Commodities are a solid alternative to diversify a traditional portfolio of stocks and bonds. Commodities have historically acted as a good portfolio diversifier that zigs while traditional assets like stocks and bonds zag.