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Top 10 Commodity Tracking ETFs

Our goal in this profile is to help investors wade through the many competing ETF offerings available. Using our long experience as an ETF publication, and nearly 40 years in the investment business, we can help select those ETFs that matter and may or may not be repetitive. The result is a more manageable list of issues from which to view and make selections.

With inflation pressures waxing and waning many believe it's important to have portfolio exposure to a basket of commodity ETFs. Why? Because commodity markets often feature noncorrelated performance with conventional portfolios. Further, given easy money policies which began in 2008 has hurt the value of the dollar. Since most commodities are priced in dollars this puts upward pressure on prices which can become inflationary. We've cobbled some good choices of commodity tracking ETFs and ETNs where repetitive choices may exist but leave it to investors to pick the ones that suit them best. 

As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator) I know the value of having an allocation of most portfolios to the commodity sector. These provide increased diversification opportunities for any portfolio. And, in nearly 40 years of seeing these positive effects during a variety of market conditions, I know first-hand their benefits. 

We're not ranking these 10 ETFs favoring one over another so don't let the listing order mislead you. Although we may use some of these in ETF Digest portfolios it's not our intention to recommend one over another.

Whereas our previous technical analysis methodology involved using evaluating monthly charts commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Some contracts expire monthly and others quarterly. Some have serious seasonal characteristics inherent with agricultural issues such as growing seasons, weather and disease. Therefore, it pays to be active and utilize a combination of weekly and daily charts to manage risk.

Four risk factors should be considered:

'         The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs--still in limbo.

'         The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and Deutsche Bank.

'         Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors.  

'         Since most commodities trade in dollars, the value of the dollar can positively or negatively affect performance.

ProShares and Deutsche Bank features inverse and leveraged long ETFs/ETNs for those investors wishing to hedge or speculate.

DBC (PowerShares Commodity Index Tracking ETF) follows the DBIQ Optimum Yield Diversified Commodity Excess Return Index (a mouthful) which covers 14 of the most heavily traded and important physical commodities futures contracts in the world. The fund was launched in February 2006. The expense ratio is .75%. AUM (Assets under Management) equal $6.5 billion and average daily trading volume is 2.7M shares. As of mid-August 2011 there is no dividend and the YTD return was 6.20%.

Data as of August 2011

DBC Top Ten Holdings & Weightings

  1. Brent Crude Futr Mar12: 14.74%
  2. Gasoline Rbob Fut Dec11: 14.47%
  3. Heating Oil Futr Jun12: 14.34%
  4. Wti Crude Future Jul12: 12.73%
  5. Gold 100 Oz Futr Aug11: 8.15%
  6. Sugar #11(World) Jul12: 5.22%
  7. Natural Gas Futr Oct11: 5.20%
  8. Lme Copper Future Mar12: 4.43%
  9. Lme Pri Alum Futr Sep11: 4.10%
  10. Lme Zinc Future Jul12: 3.70%

DJP (Barclays iPath Commodity Tracking ETN) follows the Dow Jones-UBS Commodity Index
Total Return and is currently composed of a variety of commodity futures contracts traded on U.S. exchanges. You'll note a lesser weighting in energy in DJP versus DBC. The fund was launched in June 2006. The expense ratio is .75%. AUM $2.9 billion and average daily trading volume is less than 400K shares. As of mid-August 2011 the YTD return -2.14%.

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