Broad Commodity ETFs Beat Oil Funds

Invesco PowerShares’ Jason Bloom discusses the outlook for commodity ETFs.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Jason Bloom is director of commodities and alternatives product strategy at Invesco PowerShares. Prior to his role at PowerShares, he was a trader in the energy markets for several years. ETF.com recently caught up with Bloom to discuss whether it's too late to get in on this year's oil rally, and how to invest in the commodity rebound in general.

ETF.com: With oil up something like 70% from its January lows, is it too late to get in?

Jason Bloom: It’s not too late. When it comes to crude oil, we're going to continue to see volatility. You're going to have chances to buy the dips, so don't ever feel like you need to chase it.

We've seen a big run just in the last couple of days after the Doha meeting [of major oil-producing countries]. It feels a lot like a short squeeze to me, especially when you look at the fundamentals of storage levels and monthly storage cost.

The front end of the curve looks really overpriced relative to the futures contracts that are three to 12 months out on the curve.

While I think you're going to see crude probably closer to $48-50 by the end of this year, I would probably be looking for late this week or the next week to buy on a dip back down closer to $40 or the high $30's even, just because the front end of the curve looks overpriced.

A lot of focus is on crude oil, and rightly so. Even in our investable commodities indices, crude oil and then refined products make up 50% of the portfolio. But the outlook for total returns in the broad commodity space is probably just as good as it is in energy, and you're facing a much lower roll cost in metals, precious metals, industrial metals and even in ag.

If I look at the current roll cost in the PowerShares DB Oil ETF (DBO | D-59), you're close to 10%. But if you look at the diversified PowerShares DB Commodity Tracking ETF (DBC | D-26), you're looking at a roll cost of about 2%.

On a total return basis, a diversified basket of commodities will probably do a little better than crude oil, just because you don't have that big roll cost.

ETF.com: When it comes to commodity exposure, what's the advantage of choosing the futures-based ETFs over the equity-based ETFs?

Bloom: That is a very common question that I've been getting lately. The way I look at it is, if you have a thesis and you have an edge on where you think you're going to find returns, my rule of thumb is to find the most direct exposure to that thesis you can find.

There are second-derivatives ways to play that, like buying commodity-related equities, but you introduce a lot more risk into the equation because those equities are trading with an expectation of commodity prices implied in their valuations.

For example, I met with the head of equity research at Citi a couple months ago and asked him, "What do you think about energy equities?"

He said that equity valuations are assuming a $65 price of crude oil over the next year to two years. Thus, you could get crude moving from $40 to $50 and have nice returns in crude oil, but you could end up disappointing the valuations that investors are putting on the equities, even though your thesis on crude oil was correct.

The same thing with gold miners. Gold itself has been flat while it's consolidating for the last couple of weeks, but the Market Vectors Gold Miners ETF (GDX | C-73) is up something like 8%.

There seems to be a disconnect between the valuations on the equities versus what a reasonable outlook is for some of these commodities. You're going to get leveraged exposure to the movement in that commodity, but your timing could be wrong and there's the risk that you get the valuation wrong. Essentially, you have to be right twice now instead of right once. That's harder to do.

Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.