Commodities: Broad Market
The broad commodity ETF space has no clear winner. There's no "right" way to index commodities, so many disparate choices here are equally valid.
We've chosen to
“DBC isn't perfectly neutral, but its strategy makes sense” benchmark against the popular S&P GSCI, a production-weighted index which gives nearly 3/4 of its weight to energy, and nearly 1/2 to oil alone. Two funds—GSG and GSP—track this index directly, while others track variations.
Another established choice is the Bloomberg Commodity index (formerly the Dow Jones-UBS Commodity Index). It takes a more nuanced view by weighting its components by both production and liquidity, and capping exposures at both the commodity and sector levels. DJCI and DJP track it directly.
Alternative strategies abound, with funds that select and/or weight their holdings by things like consumption, contango, or momentum. At the extreme is FTGC, the first actively-managed commodity ETF.
Many funds in the space attempt to mitigate the effects of contango. This could be as simple as holding a fixed ladder of contracts up to a year out, or it could mean complex optimization schemes. Most of these funds cost more than their front-month counterparts.
You'll also need to make a decision about structure. Commodity pools have complex tax implications that could help or hinder you. ETNs are simpler at tax time, but come with counterparty risk.
Finally, you'll need to be sure the fund you want is accessible. Traders who demand liquidity above all else will want to stick with DBC or DJP, but plenty of other options exist for those who don't mind slightly higher trading costs. Be aware that about half the funds in the segment see subpar tradability, ranging from somewhat illiquid to untradeable at all sizes. A handful of funds are at risk of closure due to weak investor interest.
We've chosen DBC as our Analyst Pick. It isn't perfectly neutral, but its strategy makes sense—it caps our benchmark's heavy weighting to energy, while optimizing contract selection. It's also eminently liquid. (Insight updated 02/27/17)
All Funds (21)
GCC $212.15 M 212151161.745 Expensive
PDBC $708.3 M 708296760 New; No K-1
GSG $1.12 B 1117287780 Commodity pool version of GSP
DJCI $131.34 M 131339602.464 Cheapest in segment
DBC $2.52 B 2518000845.5001 Most liquid
BCM $51.26 M 51259409.8509 Optimized version of DJP
DJP $955.63 M 955633214.239 Liquid ETN
USCI $560.43 M 560434972.5 Selects by contango
FTGC $141.15 M 141154967.86436 Active 40 Act ETF
UCI $99.67 M 99674216.1324 Cheap alternative take
SBV $664.19 K 664191.154 High closure risk
RJI $253.0 M 253000000 Broadest exposure
CMDT $23.83 M 23826985 High closure risk
GSP $29.18 M 29181305.9064 ETN version of GSG
GSC $114.83 M 114828400 Very expensive
CSCR $1.07 M 1072974.76063 High closure risk
DWAC $6.17 M 6173549.388 N/A
RCOM $15.51 M 15507051.69 N/A
UCIB $21.77 M 21767400 same index as UCI
DPU $394.8 K 394800 Closed to creations
CSCB $1.11 M 1110000 High closure risk
ETF.com Grade as 02/23/17
Commodities: Broad Market
ETF.com Efficiency Insight
DJCI has an edge over its peers in Efficiency thanks to a lowest-in-class expense ratio, excellent tracking and a tax-advantaged structure. The ETN charges just 50 bps, lags its index
“For those willing to pay a bit more, the range of options widens considerably” within by roughly the amount of its fee, and is taxed at ordinary capital gains rates. In contrast, the remaining funds charge 55-125 bps and many follow their indexes at a much wider pace.
That said, most funds in the broad commodities segment are at least viable, and track more or less in line with their fees. For those investors willing to pay a bit more, the range of options widens considerably.
One of the more important considerations here is fund structure. Most of the segment is made up of ETNs, which are taxed at normal capital gains rates and have no special tax implications. They do, however, come with counterparty risk—currently low for all funds.
A handful of funds are structured as commodity pools. These distribute a K-1 at tax time and are marked to market, meaning you will be taxed on all gains and losses at year-end whether you sell or not, at a blended long-term/short-term rate.
Two somewhat recent launches, FTGC and PDBC, are structured as open-ended 1940 Act funds. That's the most common structure for equity funds, but it was unheard of in the commodity space until 2013.
About 1/3 of the funds in this segment are at high risk of closure due to little or no investor interest. Most of these are ETNs, which sometimes "close" by de-listing without returning capital, leaving investors to either hold their shares until a distant maturity date or try to sell them OTC, a particularly nasty dilemma. We recommend caution in holding these funds. (Insight updated 02/27/17)
ETF.com Tradability Insight
There are two highly liquid funds in the broad basket commodities segment; DBC and DJP. DBC is by far the most frequently traded, with over $40M changing hands on a typical day, while DJP
“DBC is by far the most frequently traded” sees about half that. That's enough volume to accommodate multiple creations and redemptions daily for both funds. The two funds also see the segment's narrowest average trading spreads.
Moving down the rankings, you will find multiple funds with more than enough volume for most retail traders, and average spreads that are a notch wider than the two segment leaders but still very workable. USCI in particular stands out for its tight spreads and strong volume.
Be careful trading funds with less than about $1M changing hands daily. The spread figures here are only the average inside spread, and the low volume of these funds implies that even modestly sized trades could blow open the order book. Near the bottom of the list are several highly illiquid funds that often go days or weeks with no trades at all.
Lastly, beware of DPU. It's been closed to creations since 2012 and is extremely illiquid, leading it to trade at very wide premiums and discounts against its NAV. The fund is effectively untradeable at all sizes. (Insight updated 02/27/17)
ETF.com Fit Insight
The broad commodity baskets differ greatly from each other. The commodities space is a difficult one to index, and each index provider approaches it in a different way. For example, the
“The commodities space is difficult to index” most commonly cited index, the S&P GSCI, is a production-weighted index of 24 commodities. It heavily weights energy, and crude oil in particular. In contrast, the Dow Jones-UBS Commodity Index caps individual commodities and commodity sector weights to produce a more balanced portfolio, and there are a dozen variations in between. Since the indexes pick commodities and determine commodity weights differently, it's no surprise that the resulting portfolios are enormously different.
The range of funds is plain to see, even just looking at the sector allocations. GSC, GSG, GSP and SBV—which track versions of the GSCI—allocate about 72% of their portfolios to energy, leaving about 18% for agriculture and livestock, and about 10% for the various metals.
At the other end of the spectrum, GCC equally weights its 17 commodities, resulting in an energy allocation of just 18% and an agriculture allocation of nearly 60%. USCI also equally weights its commodities—which it selects dynamically based on momentum and term structure—and allocates 21% to energy and 64% to the ags, as of this writing.
In between are the products that track versions of the Dow Jones-UBS index—DJP, and DJCI—with about 30% in energy, 15-30% in agriculture and 20-30% in metals. BCM, UCI, RGRC and RJI also hold reasonably balanced portfolios, with 35-45% in energy each. The last products—DBC, DPU, CSCB and CSCR—have much higher allocations to energy (about 50-60% each), but are still more balanced than the GSCI-based products.
Although all of the broad commodities baskets use futures contracts for their exposure, they pick them in different ways. DJCI, DJP, GSG, GSP and RJI hold the front-month (or nearest-to-expire) contracts on each of their commodities, while the other products dynamically pick contracts to try to dampen contango. The choice of contract can sometimes have as big of an impact on performance as the choice of commodity, so neither can be safely ignored in your quest for the right commodities fund.
Ultimately, investors will need to look carefully at each commodity basket to find the one that comes closest to their needs, while ensuring that the methodology for picking and rolling futures contracts is also in line with expectations. (Insight updated 02/27/17)