Commodity ETFs In Free Fall ... Again

Commodities and their related ETFs are free-falling. After a brief period of calm during the past few months, major commodities are sinking once again. From metals to energy to agriculture, every segment of the market remains extremely weak.

The Bloomberg Spot Commodity Index, which is weighted based primarily on trading volumes, this week hit the lowest levels since the financial crisis and is down 16.2% year-to-date. The S&P GSCI Spot Index, which is weighted based on world production levels, is down 19.7%.

Bloomberg Spot Commodity Index & S&P GSCI Spot Index Since 2004

Due to the ill effects of roll costs from contango, ETFs tied to these indexes have performed even worse. The iPath Bloomberg Commodity Index Total Return ETN (DJP | C-18) lost 24.7 year-to-date, while the iShares S&P GSCI Commodity-Indexed Trust (GSG | D-91) shed 27.9%.

YTD Returns For DJP, GSG

Metals Hit Hardest

The drop in commodities has been across the board, with no segment of the market immune from the downturn. However, the one area that seems to be taking the brunt of the recent selling is the metals sector.

Copper, in particular, is getting crushed, with the red metal now down 25.5% in 2015. Zinc, aluminum, lead and nickel are all down significantly, with losses from 15 to 40%.

The DB Base Metals Fund (DBB | C-80), which tracks an index of three base metals futures contracts, lost 27.7% so far this year.

The slowdown in China is the obvious culprit for metals' recent troubles. But that's not the only issue. Supply is just as big a negative factor. Responding to record-high prices during the past decade, producers aggressively ramped up production capacity.

That production capacity, which was billions of dollars and years in the making, is now keeping these markets saturated with supply. Companies are slowly trying to pare back production, but so far they haven't been successful in turning the tide.

"Ongoing price weakness, in spite of price-related output cuts, is consistent with our view that producers do not move markets into deficit by cutting supply ... rather, they move markets closer to balance," said analysts at Goldman Sachs.

Of course, base metals don't make up the entire metals market. Precious metals have also been hurt by the potential for the first Fed rate in nearly a decade later this year.

The SPDR Gold Trust (GLD | A-100) is down 10% year-to-date, with gold currently trading at its lowest point in 5 1/2 years below $1,100/oz. Meanwhile, the notoriously volatile Market Vectors Gold Miners ETF (GDX | C-81) plunged 29.6% this year.

YTD Returns For DBB, GLD, GDX

Energy Hovers Near The Lows

At the same time that metals are plunging, the energy sector is also seeing widespread losses. Crude oil, which fell a whopping 46% in 2014, is down another 24% this year.

Wednesday morning, WTI crude oil futures briefly fell below the$40 level before climbing back over it, quite close to the multiyear low of $37.75 set in August. For now, bulls may take solace in the fact that prices haven't broken down to new lows. But in the short term, there is little to cheer about on the fundamental front.

Based on current OPEC production levels, the International Energy Agency expects supply to outpace demand next year by nearly 500,000 barrels per day, keeping upside pressure on already-bloated inventories.

That said, in contrast to other commodity markets, oil demand is surging on the back of lower prices―a positive sign for the longer-term outlook.

In terms of ETF performance, the oil-futures-linked United States Oil Fund (USO | B-100) tumbled 36.7% this year, while the energy equity ETF, the Energy Select SPDR (XLE | A-90), outperformed, with a 13% loss.

Meanwhile, the second-most-important energy commodity after oil, natural gas, hasn't done much better in 2015. Prices are down 19% year-to-date due to similar oversupply concerns and a warm start to the Northern Hemisphere winter.

The futures-linked United States Natural Gas Fund (UNG | B-94) has dropped 34% this year, while the equity-based First Trust Revere Natural Gas ETF (FCG | B-95) has tanked a whopping 45.7%.

The long-term outlook for the natural gas sector is challenging, but there could be upside potential for daring investors.

YTD Returns For USO, XLE, UNG, FCG

Steady Drop Lower In Ags

Of course, with metals and energy sinking, there's little reason to expect that agriculture would fare any better. Prices for most grains, soft commodities and livestock are down anywhere from 16 to 32% this year, with coffee and lean hogs faring the worst.

The only real outperformer has been cocoa, up 14.4%, which makes it the top-performing of all commodities. Unlike other commodities where supplies are booming, the situation for cocoa is the reverse, as crop disease and turmoil in the producing countries of West Africa take their toll.

"All commodities ran up from 2000 to 2008 and then they are basically back down again where they started 15 years ago, with the exception of cocoa,” Dennis Melka, chief executive officer of United Cacao, told Bloomberg. “It’s really because of the underinvestment in the production side."

The iPath Bloomberg Cocoa Subindex Total Return ETN (NIB | C-96) closely tracked underlying cocoa prices, rising 13.6% this year. On the other hand, the PowerShares DB Agriculture ETF (DBA | B-7), which holds a basket of agriculture futures contracts, lost 18.4%.

At the middle of the pack is the Market Vectors Agribusiness ETF (MOO | B-71), which holds a basket of companies that make their money in the agriculture sector. It's down 8.1% on a year-to-date basis.

YTD Returns For DBA, NIB, MOO

Contact Sumit Roy at [email protected].