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For investors interested in allocating a portion of their portfolios to commodities, there are a number of ways to do so. You can get exposure to commodities through shares of companies that are involved in the energy, metals, or agriculture space. That could be done directly by purchasing shares of one company or through an ETF that holds the shares of many companies. Another way to get exposure to commodities is by trading futures. In the case of precious metals, you might even consider purchasing the physical metal as a means of gaining exposure to commodities. Depending on the investment you choose to make, the correlations to the prices of underlying commodities will vary.

If you are an investor who has an interest in broad commodities exposure and would prefer not to take on the risk of trading futures or trying to pick the right companies to profit from a rise in commodities prices, there is one exchange-traded fund in particular that is worth considering. The Invesco PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC) tracks the "DBIQ Optimum Yield Diversified Commodity Index Excess Return" index. That index is composed of futures contracts on 14 different commodities. Those commodities are: aluminum, Brent crude oil, copper, corn, gold, heating oil, natural gas, RBOB gasoline, silver, soybeans, sugar, wheat, WTI crude oil, and zinc.

The index and fund have the same base weights for each of the commodities, and, as futures prices change, the weighting of each commodity will fluctuate off the base. As of 11/28/2012, the current and base weightings in the index were as follows:

Commodity

Current Weighting

Base Weighting

Aluminum

4.24%

4.167%

Brent Crude Oil

12.53%

12.375%

Copper - Grade A

4.18%

4.167%

Corn

5.57%

5.625%

Gold

7.83%

8.000%

Heating Oil

12.42%

12.375%

Natural Gas

5.51%

5.500%

RBOB Gasoline

12.66%

12.375%

Silver

2.06%

2.000%

Soybeans

5.40%

5.625%

Sugar #11

5.61%

5.625%

Wheat

5.49%

5.625%

WTI Crude Oil

12.31%

12.375%

Zinc

4.20%

4.167%

When rolling the 14 commodities up into the three bigger themes of energy, metals, and agriculture, you will discover that energy has the largest base weighting at 55%, followed by metals and agriculture at 22.5% each. Before purchasing this fund, you will need to decide whether that type of allocation is right for your portfolio's commodities exposure. In order to do that, you will have to think about why it is you are investing in commodities and the role that you hope commodities will play in your portfolio. In my article, "Two Big Commodity Themes You Should Think About," I discuss two overarching themes that drive investors into commodities: future global supply/demand imbalances and currency debasement.

When I look at the list of commodities in DBC and the allocations to each, I see 10% of the fund that clearly benefits from the currency debasement theme. Large numbers of investors buy gold and silver to protect against fiat currencies. Additionally, I see another 28.917% of the base weightings that are influenced to varying degrees by the currency debasement theme, although not to the same extent as gold and silver. That 28.917% comes from WTI crude oil, Brent crude oil, and copper. As far as the remaining nine commodities go, while currency debasement may be on the minds of people who trade those commodities, I don't think it's a large enough driver of the prices of those commodities to worry about. Of course, under a hyperinflation scenario, all bets are off, and all 14 of those commodities will be on the table as currency debasement trades. But for now, only a select few are worth paying attention to.

If currency debasement is your fundamental reason for wanting commodities exposure, then purchasing the SPDR Gold Shares (NYSEARCA:GLD) or the iShares Silver Trust (NYSEARCA:SLV) is likely a better way to get the correlations you are looking for. But for those investors wanting broad-based commodities exposure primarily because of worries about future supply/demand imbalances, DBC is a convenient way to achieve that exposure.

Addressing Potential Concerns

I would like to anticipate potential concerns investors will have when deciding whether this fund is right for them and address those concerns one by one.

The allocations just aren't right

Of course, given that there are millions of investors with unique considerations and needs, DBC's allocations to the 14 commodities mentioned above may not be right for everybody. But don't let the perfect be the enemy of the good. If you want broad-based and convenient exposure to some of the most important commodities in the world, this fund does that for you. Should you feel the need to adjust the allocations, DBC could serve as the core of your commodities exposure, and other funds could be used to trade around the position and adjust the allocations as you see fit.

For example, if the Fed decides to increase QE purchases to a degree that makes you want more exposure to gold and silver, you can purchase GLD and SLV in amounts that you see fit to adjust the overall allocation of your commodities exposure. Let's say you are willing to allocate up to $100,000 toward commodities and own $67,000 of DBC as the core holding. At 8% and 2% of the base weighting, gold and silver would represent $5,360 and $1,340 respectively of the $67,000 DBC position. By purchasing $15,000 of GLD and $5,000 of SLV, you would increase the gold allocation to $20,360 ($5,360 in futures and $15,000 in "physical" exposure) and the silver allocation to $6,340 ($1,340 in futures and $5,000 in "physical" exposure). Your allocations to gold and silver would rise to 23.40% and 7.29% respectively. The total commodities exposure in your portfolio would rise to $87,000, leaving you $13,000 of cash that could still be allocated to commodities. This would also simultaneously lower the allocations of the other 12 commodities.

Using this past summer as an example of a time you may have wanted more exposure to agriculture, you could have used the Invesco PowerShares DB Agriculture Fund (NYSEARCA:DBA) to up your exposure to soybeans, corn, wheat, and sugar, while also gaining a bit of exposure to cocoa, coffee, lean hogs, and live cattle. Like DBC, DBA is a fund that also invests in futures contracts.

One final example involves natural gas. Natural gas prices rallied strongly from mid-April to mid-October. With only a 5.50% weighting to natural gas, it would have been hard to benefit much from the strong advance in natural gas prices just by holding DBC. Instead, you could have used the cash designated toward adjusting the commodities allocations in your portfolio to purchase the United States Natural Gas Fund (NYSEARCA:UNG). That fund's focus is on tracking the futures price of the front month natural gas contract traded on the NYMEX.

By complementing your DBC purchase with other funds, you can easily adjust the overall allocation of your core commodities holding as you see fit.

Contango destroys the value of commodities futures ETFs

As investors in the United States Oil Fund (NYSEARCA:USO) and the United States Natural Gas Fund have learned over the past few years, when front month futures contracts are trading at prices well below those of further dated contracts, the act of rolling into more expensive contracts on a monthly basis can be very detrimental to overall returns. As an example, WTI light sweet crude oil is now trading at nearly triple its bear market low of just a few years ago. USO, on the other hand, which tracks the front month WTI crude oil contract, is only up 43.34% since its February 2009 low.

DBC attempts to mitigate this concern by using a rules-based approach to replacing expiring contracts with new contracts. This rules-based approach is called "The Optimum Yield." In a nutshell, "The Optimum Yield" approach looks at the next 13 months of futures contracts on each commodity and selects the one with the highest "implied roll yield." The goal is to minimize the negative effects of contango (having to roll contracts into higher priced contracts) and maximize the benefits of backwardation (the opportunity to roll contracts into lower priced contracts) by selecting the futures contract that will have the best outcome for the fund.

A quick glance at the current futures held by DBC confirms that the fund does not just hang out in the front month contracts. At this time, just two of the 14 commodities, RBOB gasoline and Brent crude oil, are being held via the front month contract. The remaining exposure of the fund is in expiration dates going out to December 2013.

You may be thinking that while "The Optimum Yield" approach works to protect DBC, should you decide to adjust the allocations of your commodities exposure using other exchange-traded funds, those funds might not do as good of a job protecting investors. This is a valid point, and I will address it in the following way: First, if you want to adjust your energy exposure using funds like USO or UNG, which have suffered tremendously due to contango, you will want to be aware of two other funds, the United States 12 Month Oil Fund (NYSEARCA:USL) and the United States 12 Month Natural Gas Fund (NYSEARCA:UNL). These funds, instead of tracking just the front month contract, diversify across the front 12 contracts, thereby mitigating the negative effects of contango. For more details about when to own the front month contract versus the front 12 contracts, consider reading "When Trading Natural Gas, Don't Forget This Fund."

The fund has a high expense ratio

DBC's expense ratio is 0.93%. Of that, 0.85% is the management fee, and 0.08% is an estimated futures brokerage fee. My response to those who worry about the 93 basis points expense ratio is, "This is the price you pay for convenience." While I agree it is not cheap, I also don't consider 93 basis points overly expensive.

Keep in mind that if you currently get your commodities exposure through hedge funds, you are likely paying more (perhaps much more) than 93 basis points. If you decide to trade the futures yourself, across 14 different commodities, there certainly is also the possibility that you would end up realizing a higher cost of trading than the 93 basis points the fund charges.

An additional benefit of having your exposure in one exchange-traded fund instead of in a hedge fund or spread across 14 different futures contracts is the ability to liquidate your holdings at optimal prices and at optimal times. That isn't always the case when investing with a hedge fund or in a futures contract in which liquidity is low. This convenience might help you further justify the 93 basis points expense ratio.

When trading futures, I can leverage the position

DBC is a marginable security. Therefore, if you want to leverage up your DBC position, you can do so after filling out a margin agreement with your broker. Additionally, you could leverage your position using options. DBC's option chain includes contracts expiring all the way out to January 2015. I would like to caution, however, that DBC's option chain is not a very liquid one. It has wide bid-ask spreads, and market depth could be a problem depending on the size of your positions.

I don't like Schedule K-1s. Does this fund issue a K-1?

As it states in the PowerShares DB Commodity Index Tracking Fund's prospectus:

The Fund will file a partnership tax return. Accordingly, tax information will be provided to Shareholders on Schedule K-1 for each calendar year as soon as practicable after the end of such taxable year but in no event later than March 15. Each Schedule K-1 provided to a Shareholder will set forth the Shareholders' share of the Fund's tax items (i.e., interest income from T-Bills, short-term and long-term capital gain or loss with respect to the futures contracts, and investment expenses for the year) in a manner sufficient for a U.S. Shareholder to complete its tax return with respect to its investment in the Shares.

If you purchase DBC, you will be receiving a K-1.

How does DBC compare to the CRB Index?

According to the PDF presentation found here, the Thomson Reuters/Jefferies CRB Index is composed of the following commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, and wheat.

Although there are 19 commodities in the CRB Index, versus 14 in DBC, there are actually seven commodities (not five) included in the CRB Index that are not found in DBC. Those seven commodities are cocoa, coffee, cotton, lean hogs, live cattle, nickel, and orange juice. Also, DBC includes two allocations that the CRB Index does not. DBC divides its crude oil allocation between Brent crude and WTI light sweet crude. The CRB Index, however, does not include Brent crude oil. Furthermore, DBC has an allocation to zinc, which the CRB Index does not.

The commodities included in the CRB Index that are not included in DBC make up 24% of the index. The breakdown is as follows: live cattle (6%), cocoa (5%), coffee (5%), cotton (5%), lean hogs (1%), nickel (1%), and orange juice (1%).

In terms of how the weightings of the remaining commodities in the CRB Index and DBC compare, let's take a look:

Commodity

DBC Base Weighting

CRB Index Weighting

Aluminum

4.167%

6.00%

Brent Crude Oil

12.375%

0.00%

Copper

4.167%

6.00%

Corn

5.625%

6.00%

Gold

8.000%

6.00%

Heating Oil

12.375%

5.00%

Natural Gas

5.500%

6.00%

Gasoline

12.375%

5.00%

Silver

2.000%

1.00%

Soybeans

5.625%

6.00%

Sugar

5.625%

5.00%

Wheat

5.625%

1.00%

WTI Crude Oil

12.375%

23.00%

Zinc

4.167%

0.00%

When comparing DBC's weightings to CRB's, I think DBC is better allocated with respect to aluminum, gold, silver, and wheat. On the other hand, I think the CRB Index is better allocated with respect to heating oil, gasoline, and zinc. In today's day and age of relentless QE, I prefer a higher weighting to gold and silver than the CRB Index provides. In fact, within my commodities exposure, I want an even higher weighting than DBC provides. The aluminum allocation in the CRB Index seems too high for my comfort, and the zinc allocation in DBC seems too high as well. I think a better allocation for wheat is somewhere between the CRB Index's and DBC's allocations. Regarding heating oil and gasoline, from my perspective, DBC seems way off in its large weightings to those two commodities.

But as I mentioned before, don't let the perfect be the enemy of the good. DBC is still a solid fund to use as a core commodities holding, and other funds can be added to the allocation to adjust the individual component weightings accordingly. If you are looking for broad-based commodities exposure for your portfolio, DBC is a fund that should be at the top of your list.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long gold and silver.