In a sign that the once-exclusive commodities markets are increasingly opening their arms to average investors, PowerShares Capital Management and Deutsche Bank on Friday launched seven new commodity-based ETFs on the American Stock Exchange. The launch is a response to an insatiable appetite for both exchange-traded funds and commodity-linked investments. In 2006, assets in nine then-existing commodity ETFs rose 191%, with total assets of $13.5 billion, according to State Street Global Advisors. The launch also comes at a time when commodities have been volatilie. In fact, over the past few days it's been downright brutal for commodities such as oil and copper. Nevertheless, "there is definitely demand among both retail and institutional investors for exposure to the commodity markets," says Pavel Molchanov, energy analyst at Raymond James. "These ETFs are a positive development in that they give exposure to the direct commodity arena in a way that's accessible to even small investors." The new exchange-traded funds are linked to indices that track futures contracts, and are based on the "Optimum Yield" versions of the Deutsche Bank Liquid Commodity Index subindices. This means that when the next-to-expire contract is trading below contracts expiring in later months, the indices try to minimize the negative impact of that. And when it's trading above, they try to take advantage of that.
Of the seven new ETFs, three provide exposure to a single commodity while the rest track a basket of two or more commodities. There's the PowerShares DB Oil Fund (DBO), which follows the performance of light sweet crude oil; the PowerShares DB Silver Fund (DBS), which reflects the price of silver; and the PowerShares DB Gold Fund (DGL), which tracks gold. ETFs on the market that provide exposure to gold and silver include the streetTracks Gold Trust ( GLD), the iShares Comex Gold Trust ( IAU) and the iShares Silver Trust ( SLV). These products don't hold futures contracts but instead hold the actual metal in a vault. There also are other ETFs that track energy, such as the United States Oil Fund LP ( USO), which invests in energy futures contracts, and others that provide broad-based exposure to commodities, such as the PowerShares DB Commodity Index Tracking Fund ( DBC) and the iShares GSCI Commodity-Index Tracking Fund ( GSG). The ETFs that represent baskets of commodities include the PowerShares Deutsche Bank Agriculture Fund (DBA), which tracks corn, wheat, soybeans and sugar; the PowerShares DB Base Metals Fund (DBB) , which provides exposure to aluminum, zinc and copper; the PowerShares DB Energy Fund (DBE), which tracks light sweet crude oil, heating oil, Brent crude oil, RBOB gasoline and natural gas; and the PowerShares DB Precious Metals Fund (DBP), which tracks gold and silver. According to Greg Newton, who runs the Naked Shorts blog, the agricultural ETF will generate interest because of many developments in the space -- for instance, demand for corn, which has risen due to the expansion of corn-based ethanol in the U.S.
Base metals, says Newton, are in a corrective phase, so it's not the best time to have a long position there; however, he says, there likely still will be investors who want to be long. While many expect the products will generate demand, others have yet to make up their mind. "For the last year, commodities have been the hot market," says Dave Fry, founder and publisher of investment newsletter ETF Digest. But he points out that the recent volatility afflicting some commodities, such as copper and oil, makes it difficult to decide whether to invest in a commodity ETF right now. More ETFs likely will come in the form of both single commodities and mixed baskets, as sponsors look to take advantage of the increasing interest in commodities and the growth of ETFs overall.