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Your Path to Precious Commodities

One thing that has been clear about ETFs is that new product innovation will allow individual investors to access parts of the market that had not been easily available. The folks at PowerShares, in conjunction with Deutsche Bank, have rolled out a couple of products so far, and on Friday they rolled out seven new commodities-based ETFs.

Here are the seven:

  • PowerShares DB Agriculture Fund (DBA)
  • PowerShares DB Base Metals Fund (DBB)
  • PowerShares DB Energy Fund (DBE)
  • PowerShares DB Oil Fund (DBO)
  • PowerShares DB Precious Metals Fund (DBP)
  • PowerShares DB Silver Fund (DBS)
  • PowerShares DB Gold Fund (DGL)

As evidenced by the names, some of the funds (Oil, Silver and Gold) invest in single commodities, and those charge a 0.50% expense fee. Some are multi-commodity funds (Agriculture, Base Metals, Energy and Precious Metals) and charge a 0.75% fee. The various funds will use futures contracts to create the exposure. All of the funds employ something called the optimum yield formula, which is an attempt to minimize the consequence of price distortions caused by rolling to new futures contracts, known as contango, as current ones expire.

Chances are you have heard the virtues of the diversity that comes with commodity exposure. This is true, and according to information about the funds from Deutsche Bank, the track records of the underlying indices all have very low correlations to the S&P 500.

This is an important point. The stock market has an up year the vast majority of the time. If you are buying something you expect will have a low correlation to stocks, you need to be prepared for the possibility that the commodity fund you buy may not go up very often, or more likely will not go up as much as stocks might, over the longer term.

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