Following The Money In Commodities ETFs

December 26, 2012

Just what are you investing in when you invest in commodities ETFs?

There’s no real “market cap” of a commodity, so we’ve had countless debates here at IndexUniverse about whether the best proxy to determine weights is production, consumption or open interest on futures contracts.

Some commodities indexes, like the Rogers indexes, attempt to determine each commodity’s “economic importance,” and then use that figure to determine weights.

I want to propose a new way, which may not be academically rigorous, but interesting all the same.

While working on our Commodities ETF Analytics launch this month, I was surprised to notice how unevenly assets were spread across different types of commodities, so I decided to construct indexes based upon ETF/ETN assets.

After all, most of the popular commodities ETFs and the indexes they track make relatively heavy allocations to energy and light allocations to the precious metals.

The five most popular commodities ETPs on the market right now and their assets are:

  • PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), $6.53 billion
  • iPath Dow Jones-UBS Commodity Total Return ETN (NYSEArca: DJP), $1.94 billion
  • iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG), $1.15 billion
  • ELEMENTS Rogers International Commodity - Total Return ETN (NYSEArca: RJI), $649.2 million
  • United States Commodity Index Fund (NYSEArca: USCI), $483.1 million

The breakdown of specific commodities in each of the funds is as follows:

Sector Allocations of the Top 5 Basket Commodities ETPs

Those five commodities funds look very different than the fund that would result from combining all the single-commodity ETPs on the market, which would be almost entirely a gold fund.

I looked at each single-commodity ETP on the market—that is, any fund that specifically tracks one commodity, be that gold, wheat, copper, etc.—then weighted each commodity by the assets tied to it, and called it the ETP AUM Commodity Index.

My ETP AUM Commodity Index’s top five holdings are below:

Index 1: ETP AUM Commodity Index

None of the basket funds allocate much to gold or other precious metals, so this ETP AUM Commodity Index doesn’t look like any of them. Really, it looks like the SPDR Gold Trust (NYSEArca: GLD), which accounts for about 70 percent of all single-commodity ETP assets.

Given GLD’s dominance, I thought it’d be interesting to get rid of the physical metal funds and see what the resulting basket of single-commodity ETPs would look like.

After all, the commodity-basket ETPs on the market are currently all entirely based on futures. The top five commodities look pretty similar, but the heavier weightings shift from the precious metals into energy. I’ll call this one the ETP AUM Commodity ex-Physicals Index.

Index 2: ETP AUM Commodity ex-Physicals Index

Once the physical metals are removed from the mix, the lion’s share of assets go to crude oil and natural gas, making index 2 look a lot like GSG—albeit a GSG with a higher allocation to gold.

One of the interesting things to note from the exercise so far is how few investors seem to be interested in single-commodity ETPs outside of gold, silver, crude oil and natural gas.

Apart from those four commodities, there are only three commodities ETPs with over $100 million in assets: The ETFS Physical Platinum Shares (NYSEArca: PPLT), the ETFS Physical Palladium Shares (NYSEArca: PALL) and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEArca: JJC).

I also noticed a big coverage gap: There aren’t any single-commodity livestock funds. That might be because the three basket livestock funds, with the exception of the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (NYSEArca: COW,) have been terribly unpopular. Even COW only has $66 million in assets, but I found that fact interesting all the same.

The last basket I constructed is based on the sector commodity ETPs on the market. Rather than look at single commodity funds, I looked at the funds that specifically try to capture a sector, be that agriculture, energy, etc. I also included sub-sectors like grains, softs and livestock, which I rolled up into the four broader sectors. The difference between the sector-based commodity index I constructed and the commodity ETPs on the market is even more striking.

Index 3: ETP AUM Commodity Sector Index

None of the five broad ETPs mentioned above come close to matching the ETP AUM Commodity Sector Index’s massive allocation to agriculture or miniscule allocation to energy, though USCI comes the closest.

I have two possible interpretations of the AUM-based indexes.

The first is based on the assumption that commodities ETP investors are buying broad-basket funds and using the single-commodity and sector ETPs to supplement their basket exposure to get the allocations they like. That interpretation would imply that investors want a basket with more exposure to agricultural commodities and precious metals, mostly gold.

The other interpretation assumes that the investors buying single-commodity and sector ETPs are doing so tactically and are not, at the same time, also buying an imperfect basket that requires supplementation. That interpretation is less actionable, unless you’re a follow-the-money investor.

Ultimately, the choice of commodities exposure will come down to your own investment ideas and the fund or combination of funds that best fit those ideas.

And, fortunately, investors do have plenty of choices. There are currently 109 unleveraged exchange-traded commodities products on the market, so in all likelihood the products are out there to fit most everyone’s needs.

At the time this article was written, the author held shares of DBC. Contact Carolyn Hill at [email protected].

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