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Top 10 Base Metals ETFs

Stocks in this article: DBBJJCRJZJJNLDLEDDJJU

With inflation pressures waxing and waning many believe it's important to have portfolio exposure to a basket of commodity ETFs. Why? 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.

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.

We rank the top 10 ETF by our proprietary stars system as outlined below. In the case of Base Metals there are really only the top three for most investors to focus on. The rest would appear to be a little too targeted and atypical for investors. Further, the succeeding 7 issues have seen large declines in Assets under Management and the danger always exists they fail as a business enterprise for the sponsor.

  If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to support@ETFDigest.com and we'll attempt to satisfy your interest.

 


Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity


Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity


Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity


Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

We feature a technical view of conditions from monthly chart views. We recommend longer-term investors stay on the right side of the 22 weekly simple moving average which is unique from other approaches given the high volatility in commodities and contract rollover with associated contango/backwardation issues. When prices are above the moving average, look to be long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

 

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