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%

 

JJC (iPath Copper ETN) follows the Dow Jones-UBS Copper Subindex Total Return Index which includes the single high grade copper futures contract traded on the COMEX. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $205 million and average daily trading volume is 217K shares. As of mid-August 2011 the YTD return is -12.25%.

 

 

RJZ (ELEMENTS Rogers International Commodity Metal ETN) follows the Rogers International Commodity Index-Metals Total Return Index which represents the value of 10 commodity metals futures contracts and is a sub-index of the Rogers International Commodity Index. The fund was launched in October 2007.  The expense ratio is .75%. AUM equal $66 million and average daily trading volume is 56K shares. As of mid-August 2011 YTD return was .98%.

 

 

 

JJN (iPath Nickel ETN) follows the Dow Jones-UBS Nickel Subindex Total Return Index that relates to the single commodity, nickel that trades on the London Metals Exchange. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $10 million and average daily trading volume is less than 7K shares. As of mid-August 2011 the YTD return is -16.50%

 

 

LD (iPath Dow Jones-UBS Lead ETN) follows the Dow Jones-UBS Lead Subindex Total Return Index which is a single-commodity sub-index currently consisting of one futures contract trading on the London Metals Exchange. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $34 million and average daily trading volume is 40K shares. As of mid-August 2011 the YTD return was -11.10%.

 

 

LEDD (Barclays iPath Pure Beta Lead ETN) follows the Barclay Capital Pure Beta TR Index, which is comprised of a single exchange traded futures contract of lead, except during the contract rollover period the index may be comprised of two separate futures contracts. The issuer has the option to rollover contracts at various times away from any pre-determined schedule to enhance returns based on a proprietary methodology. The fund was launched in April 2011. The expense ratio is .75%. AUM equal less than $10 million and average daily trading volume is less than 8K shares. As a new fund investors are giving it some time to season and evaluate performance. But, as of mid-August 2011 the YTD return was .74%.

 

 

JJU (iPath Aluminum ETN) follows the Dow Jones-UBS Aluminum Subindex Total Return Index which consists of a single-commodity futures contract in trading on the London Metals Exchange. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $7 million and average volume is less than 5K shares. As of mid-August 2011 the YTD return was -8.60%.

 

 

UBM (UBS Industrial Metals ETN) follows the UBS Bloomberg CMCI Industrial Metals Index Total Return Index which measures the collateralized returns from a basket of 5 futures contracts. These contracts are diversified across five constant maturities from three month up to three years. The fund was launched in April 2008. The expense ratio is .65%. AUM equal $6 million and average daily trading volume is less than 2K shares. As of mid-August 2011, the YTD return was -9.6%.

 

 

 

BDG (PowerShares Base Metals Long ETN) follows the Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals Index which is composed of aluminum, zinc and copper. We admit that it's difficult to ascertain the difference between BDG and DBB. The fund was launched in June 2008. The expense ratio is .75%. AUM equal only $1.5 million and average daily trading volume is less than 1K shares. (This may mean others are struggling to figure this out themselves.) Nevertheless, as of mid-August 2011, the YTD return is -6.60%.

 

 

JJT (iPath Tin ETN) follows the Dow Jones-UBS Tin Subindex Total Return Index which includes and tracks a single-commodity futures contract trading on the London Metals Exchange. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $15 million and average daily trading volume is 44K shares. As of mid-August 2011 the YTD performance was -16.50%.

 

 

There's a rapidly expanding series of direct commodity ETFs and ETNs especially when economic and industrial growth or contraction can dramatically affect prices. Naturally since most commodities, including base metals, are priced in dollars, the value of the dollar is another key factor to price behavior. We've chosen to feature some ETPs that may be repetitive but clearly have something to offer as well.

One thing seems clear when viewing many of these ETFs are the similar trend patterns many have presented. This is primarily due to globalization but also is the result of easy monetary conditions throughout the developed world allowing for higher prices for many commodities despite misleading official inflation data.  

For further information about portfolio structures using this or other ETFs see www.etfdigest.com .

You may address any feedback to: feedback@etfdigest.com   

 

(Source for holding data is from ETF Database and from various sponsors.)

 

 

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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