Will the New DBC and DBA Be More Volatile?

By Lara Crigger

Last Wednesday, Deutsche Bank (DB) announced plans to restructure its commodities ETFs, the PowerShares DB Commodity Index Tracking Fund (DBC) and PowerShares DB Agriculture Fund (DBA).

IndexUniverse covered the story here.

The move wasn't that surprising. After all, when the CFTC revoked DB's position limits back in August, it was really just a matter of time before the two funds either got a makeover or shut down entirely.

But DB's restructuring plans are more than just a new coat of lipstick. The revisions, slated to take effect between Oct. 19 and 31, will significantly change the commodities exposure these funds can give investors.

DBA and DBC, currently worth $2.2 billion and $3.3 billion, respectively, are two of the most popular commodities ETFs. With their high concentrations in just a few key contracts, the funds are ideal for gaining exposure to the Big Guns of the commodity markets.

DBA, for example, tracks the world's staple crops—corn, wheat and soybeans—as well as everyone's favorite additive, sugar. DBC, on the other hand, tracks two staple crops (corn and wheat), two crucial energy sources (WTI crude and heating oil), the most widely used industrial metal (aluminum) and a universally beloved safe haven, gold.

Basically, the old versions of DBA and DBC cover only the A-List commodities, the ones with the highest liquidity and rock-solid, diversified demand pictures.

New-vintage DBA and DBC, however, will incorporate commodities with a little more volatility and a little less liquidity into their composition. DBA will halve its four core agricultural positions to make room for coffee, cocoa and livestock futures, while energy-heavy DBC will drop its current 35 percent weighting in WTI crude to just 12.4 percent, adding in contracts for gasoline, Brent crude and natural gas. (See the full weightings here.)

It's not like DB is dipping into something as illiquid as lumber or uranium here. And by diversifying the portfolio, they lessen the impact of a massive swing in one of the bigger commodity contracts.

But adding in these new markets also has the potential to pump more volatility into the mix, and potentially very different returns. We've all been paying attention to what's going on in natural gas lately, right? And what about livestock? It’s been on a straight path downward for more than two years now.

Even the impact on something like Brent crude will be interesting: Brent is a popular European contract, but it's by no means as widely traded as WTI crude. (By my count, this is the first time a major commodity ETF has invested in a non-U.S. energy contract. The first, but probably not the last.)

In short: DBA and DBC won't look much like themselves anymore. They’ll look more like the more diversified commodity ETFs that are already on the market, such as the iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP) and iShares S&P GSCI Commodity Indexed Trust (GSG).

Of course, from the fund's perspective, any weighting overhaul is better than liquidation, and as the CFTC crackdown continues, I'm sure we'll see many more funds try similar alchemy in the future.

But the change is not without consequences. Investors are losing a degree of choice in the commodities market, forfeiting the option of investing only in the biggest of big commodities. And by making a foray into more narrow contracts, DBA and DBC may be potentially exposing investors to added volatility—or at least a very different pattern of returns—as well.

Original post

Comments

[Ron Rowland:]

"Will the New DBC and DBA Be More Volatile?"

I'm just spit-balling here, but my take would be that increasing the number of commodities in each fund would generally tend to reduce volatility.

Oct 05 08:56 AM

[tuj:]

Where will DBC put its NG exposure? In the front month, or across the strip?

Oct 05 11:18 AM

[Analyste de...:]

The more I think about the CFTC meddling, the more irate I become. These govt regulatory bodies are just lapdogs for the MUTUAL FUND COMPANIES, harassing the popular ETFs. Why? Because commodity ETFs are taking assets from their pricey dud funds. And "their" clients are bolting - to better, cheaper ETF investments.

This is war.

The ETF companies shouldn't be forced to dilute or muddle their funds to suit the competitors' complaint (whatever the proxy's excuse.) I don't like all-&-everything ETFs, either. NARROW index funds are what sophisticated investors want!

At some point, the little guy will have to fight back: take the battle to THEIR conference calls, haranguing mf reps in 401k meetings, even picket their offices - slay the Mutual Fund dragons. The apathetic alternative? We lose ALL access to commodity, short- and leveraged ETFs. Because the Mutual Fund companies said so?! #$%@ 'em.

Oct 05 01:54 PM

[Analyste de...:]

Ron's speculation that increasing the number of commodities in each fund would generally tend to reduce volatility WOULD be plausible, EXCEPT it appears these ETFs will be buying contracts on bourses worldwide. The implications are significant: 10% - 20% foreign exposure? Futures denominated in Roubles?

There's a MAJOR story there - lots of questions need to be asked!

Oct 05 08:25 PM

[Alan Young:]

These funds were never ideal for people who wanted to speculate on the direction of commodity futures; there are ETNs which are much better for that. But for investors who want commodities as a portfolio diversifier, it seems to me that these funds will be much better than the old versions, as they have more diversity.

A further improvement will be if DB randomizes the roll dates a bit, so other traders can't rely on a known number of contracts being bought and sold on a known date. This transparency has always put ETFs like this at a trading disadvantage.

Oct 06 03:45 AM