5 Biggest Broad Commodity ETFs Differ In Approach

February 15, 2017

Each commodity market has its own fundamentals and its own individual outlook. But there’s a general sense that 2017 could be a good year for commodities, after a long period of being underdogs.

Growth policies in the U.S. that should lead to a rise in inflation; tighter oil supplies; strong demand from the industrial sector; and crop-friendly weather in key growing regions are all factors impacting the prospects for commodity markets.

In its most recent Commodity Markets Outlook, the World Bank forecast prices for oil, metals such as lead and zinc, and some agricultural commodities all to rise this year. Precious metals, meanwhile, should remain under pressure from rising interest rates and a decline in safe-haven demand, while agricultural commodities will be faced with a mixed bag of factors.

“Energy and non-energy commodity price indexes are projected to increase in 2017 by 26% and 3%, respectively,” the report said. “Industrial commodities are expected to outperform other markets due to strong demand and tight supplies. Prices of beverages, grains, and precious metals are exceptions.”

There are many ways to invest in commodities through ETFs, each listed in our Commodity ETF channel. One of the most popular approaches, however, is through broad portfolios comprising various commodities in a single wrapper.

Here we take a look at the five largest broad commodity ETFs based on assets under management, and see how their very different methodologies have delivered different outcomes in the past 12 months.

 

 

Inner Bolts Of 5 Broad Commodity ETFs

PowerShares DB Commodity Index Tracking Fund (DBC)

DBC tracks an index of 14 commodities, investing in futures contracts that are chosen specifically to mitigate contango. In its effort to keep a lid on roll costs, DBC can be less responsive to short-term price movements than other funds.

Like many of the funds in this segment, DBC is energy-heavy, although the fund manages weighting by capping energy allocation at 60%. Currently, energy contracts represent roughly 55% of the portfolio including Brent and WTI crude, heating oil, gasoline and natural gas. The mix is rebalanced once a year.

Launched in February 2006, the fund is the largest in this segment, and costs 0.65% in expense ratio—not the cheapest. DBC trades an average of $45 million a day, with an average spread of 0.06%. DBC is up 29.14% over the last 12 months.

The fund is structured as a commodity pool, meaning it’s considered a pass-through investment, so capital gains are "marked to market" on a K-1 and passed on to investors annually, potentially creating a taxable event.

According to our tax guide, commodity pools can offer a good tax benefit for short-term investors “since 60% of any gains are taxed at the low 20% tax rate, regardless of holding period. In other structures, short-term gains are taxed as ordinary income, with rates up to 39.60%.”

iShares S&P GSCI Commodity Indexed Trust (GSG)

Launched in July 2006, GSG has $1.2 billion in assets and costs 0.48% in expense ratio. The fund trades nearly $7 million on average a day, with an average spread of 0.11%. It too is structured as a commodity pool. GSG has risen 25.10% over the last 12 months.

GSG is a vanilla approach to broad commodities, allocating heavily to energy, as most are production-weighted indexes. But what’s interesting about this fund is that it doesn’t invest in the commodities themselves.

Instead, it owns futures contracts on the GSCI index itself. The index offers exposure to front-month commodities futures contracts across some 22 commodities. The mix rebalances annually. WTI and Brent crude alone represent a combined 40% of the portfolio.

Beyond the long-dated contracts on the GSCI itself, GSG can also own cash and T-bills at times. According to our data, GSG “tends to lag its index, with greater volatility,” than the segment benchmark.

 

iPath Bloomberg Commodity Index Total Return ETN (DJP)

DJP is an exchange-traded note (ETN)—not a commodity pool like the others. As such, DJP doesn’t invest in futures contracts or commodities themselves, because it’s a debt note issued by a bank.

The risk here is counterparty risk. But there could be tax benefits for long-term investors, who “might gain an advantage because they are subject to 20% long-term gains, compared with the 60/40 blend of partnerships, which comes out to a blended maximum of 27.84%,” according to our guide.

The strategy is designed to track the Bloomberg Commodity Index, which looks to diversify its exposure by capping commodity sectors at 33% and individual commodities at 15%. These diversification parameters mean DJP offers much less exposure to energy as most other broad commodity ETFs do, and more exposure to ags and metals. Natural gas is the largest weighting, at about 12%, followed by WTI crude, at 10%. The ETN offers exposure to some 10 commodities in a mix rebalanced annually.

Launched in June 2006, DJP has $980 million in AUM, and costs 0.70% in expense ratio. The strategy trades an average of $10 million a day, with an average spread of 0.04%. DJP is has returned 21.79% the last 12 months.

PowerShares Optimum Yield Diversified Commodity Strategy No K-1 Portfolio (PDBC)

PDBC is another broad commodity ETF that looks to manage the impact of negative roll yield by being choosy in the futures contracts it owns.

The fund is built a lot like its counterpart, DBC, but there are two key structural differences. The first is that it is structured as a 1940 Act open-ended fund—an ETF—and not as a commodity pool. The second is that PDBC is actively managed. It attempts to offer exposure similar to that of DBC, but with the possibility of outperformance thanks to an active manager.

Launched November 2014, PDBC has $675 million in AUM and costs 0.60% in expense ratio—less than DBC’s price tag. The fund trades an average of $9.4 million a day, with an average spread of 0.11%. PDBC is up 29.31% over the last 12 months.

The portfolio offers exposure to 14 commodities, with energy representing about half the mix.

 

United States Commodity Index Fund (USCI)

USCI, structured as a commodity pool, is the only one of these five strategies to be equal-weighted, which means energy doesn’t drive as much of the performance of this fund as it does in competing ETFs. The portfolio rebalances monthly.

The fund invests in 14 commodity futures contracts, picking every month the seven commodities that have the biggest backwardation and the seven with the strongest 12-month price momentum, equally weighting the holdings in an effort to offer strong protection from contango. The caveat here is that the portfolio must own at least one precious metal, industrial metal, energy, livestock, soft, and grain commodity, according to our data.

Launched in August 2010, USCI has $573 million in AUM. It costs 1.02% in expense ratio—among the highest in the segment—and trades an average of $3.6 million a day, with an average spread of 0.12%.

In the past 12 months, USCI’s approach hasn’t really paid off compared with the other four strategies, due to its much-more-moderate exposure to energy. The fund is up only 2.38% in the last year. But that doesn’t mean that’s always the case. If you go back three years, the performance chart shows that USCI held off much better than most of its competitors. That goes to say that there is no right or wrong broad commodity ETF—pick the one that best fits your views on the segment.

Here’s that three-year chart, for reference: 

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]

 

Find your next ETF

CLEAR FILTER