Year-to-date, the commodity ETF that has attracted the most new net money from investors is not a gold fund or an energy ETF; it's a broad-based commodity portfolio—one that has pulled in 75% of its total assets under management (AUM) in just the past year.
The $2 billion Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) has taken in $1.2 billion in new net inflows since Jan. 1, 2018, the most of any commodity ETF, including the mega-funds SPDR Gold Trust (GLD) and iShares Gold Trust (IAU).
On a one-year basis, PDBC has brought in $1.5 billion—more than any commodity ETF besides IAU, which brought in $2.2 billion (read: "Gold ETF Flows Shift Course").
Flying Under The Radar
Up until fairly recently, however, PDBC had remained fairly undistinguished among the 128 commodity ETFs on the market.
As of this time last year, PDBC only had $477 million in AUM—healthy for a commodity ETF, but modest when compared to other sectors or asset classes, such as equities or fixed income.
Moreover, PDBC had taken three years to build up those assets. Though the fund launched in November 2014, it languished for more than a year without a day of net inflows:
Sources: ETF.com, FactSet; data as of Aug. 1, 2018
Flows into PDBC began to accelerate at the start of this year. Since Jan. 1, the ETF has seen day after day of net inflows, with investors taking money out of the fund on only five days.
So what's driving all this investor interest?
Tough Times For Commodity Investors
Since the bubble burst in 2011, investing in commodities has been a challenge, to say the least. Though outperforming funds and segments occasionally emerge, the asset class as a whole has been characterized by weak prices and middling returns.
Case in point: In July 2011, at the height of the commodity boom, investors had more than $124 billion invested in commodity ETFs. Today there's only $66 billion invested.
However, investors have begun to tiptoe toward commodities again, mostly toward precious metals that can provide some safe haven from the political uncertainty surrounding the Trump administration's trade tariffs and the specter of inflation due to rising rates.
Year-to-date, more than $1.4 billion has entered commodity ETFs, mostly into metals ETFs, such as IAU, the GraniteShares Gold Trust (BAR) and the iShares Silver Trust (SLV). Yet there's also PDBC, which has outdrawn all other commodity ETFs so far.
A Better Mousetrap
Essentially, PDBC is a tweaked version of the $2.7 billion Invesco DB Commodity Index Tracking Fund (DBC), one of the oldest and most-widely used commodity ETFs on the market.
DBC, which is structured as a commodity pool, tracks a production-weighted index of 14 different commodities futures contracts. DBC's portfolio managers select which individual contracts to invest in based on their ability to minimize contango. (Contango is when futures contracts with a later expiration date are more expensive than ones that expire sooner, a condition that can increase the expense of maintaining a constant position in a given commodity.)
PDBC holds mostly the same portfolio as DBC, except in a plain-Jane, 1940-Act open-ended fund. It uses a Cayman Islands-based subsidiary to hold the same distribution of futures contracts as DBC, except in smaller amounts; according to the rules governing '40 Act funds, futures can only comprise 25% or less of the portfolio.
The remaining 75% of PDBC is held in Treasurys and other high-quality U.S. debt securities, meaning it functions like the collateral portion of a futures investment.
All this effort allows PDBC to avoid doling out a Schedule K-1 form at tax time, which can delay filing dates and increase headaches for tax preparers (read: "K-1 Taxes Hurdle For Commodity ETFs").
Furthermore, PDBC is also substantially cheaper than DBC, with an expense ratio of 0.59% compared with DBC's 0.88%. This means PDBC offers the same broad-based portfolio as DBC, but at a fraction of the cost and no annoying tax form, to boot.
Flows Into DBC Dip
DBC, which launched in 2006, is still the largest broad-based commodity fund on the market, though PDBC has steadily climbed in market share. It also continues to attract inflows, though not at the same rate it once did.
Since the start of the year, DBC has only seen $430 million in new net money, compared with PDBC's $1.2 billion.
DBC's saving grace, though, is its massive liquidity: It trades more than twice the dollar amount daily in volume as PDBC, with $48 million in daily volume compared to PDBC's $21 million. That, combined with the higher expense ratio, makes DBC a better vehicle for short-term trading than buy-and-hold investment.
How DBC Benefits Traders
There's another advantage to trading DBC: As a commodity pool, it offers more favorable tax treatment than open-ended funds.
Whereas open-ended funds like PDBC are taxed according to how long they're in your possession, commodity pools are taxed via a time-agnostic "60/40 rule," meaning 60% of their gains are always taxed at the lower long-term rate of 20%, no matter how long they're held. The remaining 40% is taxed at the higher short-term rate of 34.6%.
As long as investors hold DBC for less than 12 months, that ETF will have a more favorable tax treatment than the cheaper, newer PDBC—extra paperwork or no. And that still seems to be enough for some investors. For now.
Contact Lara Crigger at [email protected]