Investing
  • The Deutsche Bank fund has 55% of its assets in energy, compared with 75% for the iPath GSCI and 30% for the iPath DJ-AIG.
  • The DJ-AIG ETN has a higher weighting in agricultural, or soft, commodities at 31%.
  • I’d give the iPath ETNs some time to prove themselves.
Investing
Go for the Gold, or Grain
 By Roger Nusbaum
RealMoney.com Contributor

6/21/2006 1:58 PM EDT
URL: http://www.thestreet.com/p/rmoney/investing/10292978.html

Earlier this month, Barclays Bank, the owner of iShares, listed two exchange-traded notes that are meant to be proxies for commodity indices. The iPath GSCI Total Return Index ETN (GSP:NYSE) tracks the Goldman Sachs Commodity Index and the iPath Dow Jones-AIG Commodity Index Total Return ETN (DJP:NYSE) tracks the Dow Jones-AIG Commodity Index.

The ETNs are meant to match the returns of the commodity indices without hedging, and won't insulate investors from any of the volatility associated with commodities. They charge an annual fee of 0.75%.

Like most structured products, the ETNs are debt instruments of the issuer, in this case Barclays, but they will not provide interest payments. Upon maturity, investors will receive a final payment based on a complex formula tied to the performance of the underlying index. However, whereas most structured products mature in a few years, these ETNs mature in 30.

The maturity is important. Investors with a low tolerance for volatility might buy a structured product tied to the S&P 500 that matures in three years. A product like this might, at worst, deliver a profit of $10 a share at maturity if the S&P 500 does poorly, but as a trade-off for this put option-like safety, if the index appreciates, the holder will gain less from it.

Because these ETNs have a 30-year maturity, there is none of the safety of short-term instruments -- the potential upside and downside are much greater.

That they are structured as debt products is lost on me, and I believe may confuse investors. I would say forget about the prospectus and the fact that these are debt instruments -- it's enough to know that the goal is to capture the movements of a commodity pool.

Barclays started these ETNs to compete with the Deutsche Bank Commodity Index Tracking Fund (DBC:Amex) , so the question then is if there are any differences between the three.

The Deutsche Bank fund has 55% of its assets in energy, compared with 75% for the iPath GSCI and 30% for the iPath DJ-AIG ETN.

The DJ-AIG ETN has a higher weighting in agricultural, or soft, commodities at 31%, compared with 22.5% for Deutsche Bank and 11% for the GSCI ETN.

It's easier to capture moves in energy with energy stocks. Finding stocks that narrowly capture soft commodity price movements is much more difficult, so the iPath DJ-AIG ETN is potentially useful.

A diversified portfolio should have some exposure to commodities. At times, like now, this asset class may be tougher to own, but some weighting should be maintained. I'd give the iPath ETNs some time to prove themselves, but they could be a good way to go.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.