That being said, performance in commodities has been far from even this year. For example, while gold is up 16% year-to-date, natural gas is down 21%, and oil is close to flat.
Thus, even while commodities as a whole may have turned the corner, the rebound would do you no good if you bought the wrong one. Instead, as the research suggests, investors are better off buying a broad basket of commodities as a component to a well-diversified portfolio.
ETF Selection Key
Most exchange-traded funds that track broad commodity indexes are up this year, but not all of them. The iPath Pure Beta Broad Commodity ETN (BCM | C-24), for example, gained 2.8% this year, while the iPath S&P GSCI Total Return ETN (GSP | D) fell by 3%.
Perhaps more than any other asset class, the differences between the various broad-commodity ETFs are stark. BCM, for example, tracks the Barclays Commodity Index―which weights its holdings based on liquidity and caps the weight of commodity sectors at 35%. It also picks and chooses which futures contracts to hold in an effort to mitigate the effects of contango.
Meanwhile, GSP and the iShares S&P GSCI Commodity ETF (GSG | D-91) track the S&P GSCI, which is production-weighted and doesn't cap any sectors. That leaves energy with a massive 70% weight in those ETFs.
GSP and GSG don't use any contango-mitigation techniques, which helps explain their underperformance this year.
For exposure to the S&P GSCI with contango mitigation, the iPath Pure Beta GSCI-Weighted ETN (SBV | D-62) and the GS Connects S&P GSCI Enhanced Commodity Total Return Strategy ETN (GSC | F-88) fit the bill.
Bloomberg Commodity Index
In the middle of the pack are a host of other commodity ETFs that track other big-name commodity indexes, all with their own unique twists. One of the most popular of these is from Bloomberg.
The iShares Commodity Optimized ETF (CMDT | D), the iPath Bloomberg Commodity Index Total Return ETN (DJP | C-18), and the Etracs Bloomberg Commodity Index Total Return ETN (DJCI | C-48) follow the Bloomberg Commodity Index (formerly the Dow Jones-UBS Commodity Index).
The Bloomberg index weights its holdings two-thirds by trading volume and one-third by world production, while capping the weights of the various commodities it holds.
DJP uses a simple front-month strategy to get its exposure to the index, while CMDT tries to optimize its contracts to mitigate contango and maximize backwardation.
The Bloomberg ETFs are all up less than 1% so far this year.
Meanwhile, the WisdomTree Continuous Commodity ETF (GCC | C-5) tracks the Thomson Reuters Equal Weight Continuous Commodity Index. GCC equal-weights 17 commodities and uses futures contracts averaged across the nearest six months of the futures curve to maintain its exposure.
Another ETF with an equal-weighting scheme is the United States Commodity ETF (USCI | D-11). Unlike GCC, USCI's basket of commodities isn't static. Each month, it picks the seven commodities with the greatest backwardation (or least contango) and the seven commodities with the greatest 12-month price momentum and equal weights them.
Another product with a similar strategy but with little in the way of assets is the Credit Suisse X-Links Commodity Rotations ETN (CSCR | F-16), which equal-weights eight commodities with the most backwardation.
For those who believe commodity picking is a viable strategy, two actively managed ETFs are available in the space. The First Trust Global Tactical Commodity Strategy Fund (FTGC | C) is one such active fund. Currently, FTGC is heavy on agriculture.
Another option in the active space is the PowerShares DB Optimum Yield Diversified Commodity Strategy (PDBC | F). Using active management, PDBC aims to outperform its sister fund, the PowerShares DB Commodity Tracking ETF (DBC | D-26).
DBC is the most popular ETF in the broad commodity segment, with $1.9 billion in assets, and tracks the DBIQ Optimum Yield Diversified Commodity Index. DBC holds a capped, production-weighted basket of 14 commodities, while employing contango-mitigation techniques.
Finally, there are two funds that provide broader exposure to the asset class. The Elements Rogers International Commodity Total Return ETN (RJI | C-28) holds commodities as diverse as orange juice, milk, and rapeseed. The constituents of the underlying index are chosen by a committee of "wise people" and is based on world consumption patterns and liquidity.
Meanwhile, the Etracs CMCI Total Return ETN (UCI | C) tracks an index of 28 commodities weighted based on "economic importance."
RJI uses front-month futures for its exposure, while UCI uses five different futures contracts per commodity in an effort to reduce contango.
Note: Returns based on year-to-date change in NAVs.
Contact Sumit Roy at [email protected].