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Top 10 Base Metals Commodity 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 to base metals. Base metals are the wellsprings of industrial expansion and contraction. Copper for example has earned the nickname Dr. Copper since many believe price action in this metal alone indicate future economic conditions better than any PhD. Having base metal ETF/ETNs available just adds to increased diversification opportunities for any portfolio. Uniquely, most ETF/ETNs offer unleveraged exposure to these products as opposed to having to trade directly with futures contracts and leverage.

We're not ranking these 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 these issues such as the seasonal nature of industrial expansion/contraction, global monetary policies and interest rates. 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 price behavior.

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


DBB (PowerShares/DB Base Metals ETF) follows the DBIQ Optimum Yield Industrial Metals Excess Return Index tracks futures contracts on aluminum, zinc and copper. The fund was launched in January 2007. The expense ratio is .75%. AUM (Assets under Management) equal $526 million and average daily trading volume is 288K shares. As of mid-August 2011 the YTD return was -9.25%

Data as of August 2011

DBB Top Holdings & Weightings
  1. LME Copper Future Mar 2012:  43.18%
  2. LME  Primary Alum Future Sep 2011:  39.97%
  3. LME Zinc Future July 2012:  36.12%

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