Rogers International Commodity Index TRAKRS vs. Other Commodity ETFs

May.16.06 | About: PowerShares DB (DBC)

How does the Merrill Lynch TRAKRS commodity product compare with other existing commodity index funds? TRAKRS (Total Return Asset Contracts) futures contracts are linked to the performance of the Rogers International Commodities Index [RICI].

TRAKRS differ from other futures contracts in that they are not leveraged (you must put down their full value when buying them) and (in the United States) they may be held in a regular brokerage account rather than a special futures account. These latest TRAKRS mature on October 26, 2010. At that date, the value of the TRAKR will equal the accumulated value of the Rogers Index, less a 1.95% per year fee (similar to an expense charge on a mutual fund or ETF).

If it is held in a taxable, account, any capital gains taxes will be due when the TRAKR matures. If an investor wished to maintain his or her investment in the commodities asset class, he or she will then have to either roll the after-tax proceeds into another commodities TRAKR (if one has been issued by Merrill Lynch), or another commodities ETF or mutual fund product.

So, how does this new product compare with existing commodity index products? Let's start with the underlying indices. The following table shows the weights of major commodity groups in four different commodities indices.

Goldman Sachs Commodities Index (Pending:GSCI)

Deutsche Bank Liquid Commodities Index (DBLCI)

Rogers International Commodities Index (RICI)

Dow Jones AIG Commodities Index (DJAIG)

Energy

73.0%

55.0%

44.0%

33.0%

Agricultural

16.0%

22.5%

35.0%

41.0%

Metals

11.0%

22.5%

21.0%

26.0%

Total

100.0%

100.0%

100.0%

100.0%

Click to enlarge

The next table shows the annual expense charges on index products that track these four commodity indices:

Goldman Sachs Commodities Index (GSCI)

Deutsche Bank Liquid Commodities Index (DBLCI)

Rogers International Commodities Index (RICI)

Dow Jones AIG Commodities Index (DJAIG)

Product (Ticker)

Oppenheimer Real Assets Fund

QRAAX (Mutual Fund)

Deutsche Bank Commodities  Fund

DBC (ETF)

RCI TRAKR (Chicago Mercantile Exchange Futures Contract)

Pimco Commodities Real Return Fund

PCRDX (Mutual Fund)

Expenses

1.32%

1.30% (as of 2Mar06 8K Filing)

1.95%

1.25%

Click to enlarge

In terms of long-term return correlations, the four indexes are quite similar to each other, as shown in the following table. However, as you can also see, the RICI and DJAIG, with their lower energy weightings, were considerably less volatile than the GSCI and DBLCI.

1994-2004 Return Correlations and Standard Deviation of Nominal Returns

GSCI

DBLCI

RICI

DJAIG

GSCI

1.00

DBLCI

.92

1.00

RICI

.92

.96

1.00

DJAIG

.90

.85

.91

1.00

Standard Deviation

19.6%

19.7%

14.9%

12.8%

Click to enlarge

I have not included average returns for the simple reason that, depending on the period chosen, it is easy to show any of the four indices outperforming the others.

I wrote about the new U.S. ETF that tracks the DBLCI earlier, and found no compelling reason to prefer it to my first choice, PCRDX.

When it comes to the RICI versus DJAIG index comparison, both are preferable our perspective to either GSCI or DBLCI. Both RICI and DJAIG offer a more balanced exposure to different commodities, while GSCI and DBLIC have quite heavy energy weightings.

This is important, because the diversification return is an important source of the total return on a commodities index. However, the RICI TRAKR carries a heavier expense load and will, if held in a taxable account, be subject to capital gains taxes when it matures in 2010. For this reason, I continue to prefer PCRDX as the best vehicle for implementing an allocation to the commodities asset class.