3 Contrarian ETFs From Alpha Think Tank

July 30, 2014

Broad Commodities – PowerShares DB Commodity Tracking ETF (DBC | C-26)

There’s a general consensus in the markets that the decade-old commodities bull market is over now that the Federal Reserve is tapering its quantitative easing. Adding to the slowdown in China’s growth, the outlook for commodities might look bleak.

Yet a few strategists aren’t convinced the Federal Reserve will fully taper.

In late March, Peter Schiff, chief executive officer of EuroPacific Capital, told us he already sees the equity bubble deflating, and as the stock market and real estate markets drop, the Fed will be forced to reverse the tapering and launch a new round of stimulus. He thinks most commodities will do well in such an environment, specifically mentioning agriculture, energy and based metals.

Axel Merk is also not convinced the Fed will take a tough stance on its monetary stimulus. He said in early April that based on the weakness in the housing market, he just doesn’t see a clear exit from the stimulus. With central banks around the world focused on growth, he thinks that’s supportive of commodities in general, especially after the sell-off in commodities in May 2013.

For broad, diversified exposure to commodities, DBC is a solid choice and our “Analyst Pick” for the segment. For 88 basis points, the fund tracks an index of 14 different commodities, while capping its energy weighting to 60 percent for more diversification into agriculture, precious metals and base metals.

DBC follows an “optimized” strategy, selecting specific contracts on the futures curve to mitigate any effects of contango.

Structured as a commodities pool, DBC distributes K-1s, as opposed to 1099s for tax reporting. With $5.7 billion in assets and trading more than $28 million a day at pennywide spreads, DBC remains the most popular and liquid option for broad commodities exposure.

DBC’s total returns since its peak on July 4, 2008: -44 percent (as of July 25, 2014)

Five-Year Chart

3_Broad Commodities

Charts courtesy of StockCharts.com


At the time this article was written, the author held a long position in GDX. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.


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