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David Fry, ETF Digest (68 clicks)
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With inflation pressures waxing and waning many believe it’s important to have portfolio exposure to a basket of commodity ETFs. Why? Commodity markets often feature non-correlated performance with conventional portfolios. Further, given easy money policies which began in 2008 has hurt the value of the dollar. Since most commodities are priced in dollars, this puts upward pressure on prices which can become inflationary. We’ve cobbled some good choices of commodity tracking ETFs and ETNs where repetitive choices may exist but leave it to investors to pick the ones that suit them best.

As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator) I know the value of having an allocation to base metals. Base metals are the well-springs of industrial expansion and contraction. Copper for example has earned the nickname Dr. Copper since many believe price action in this metal alone indicates future economic conditions better than any PhD. Having base metal ETF/ETNs available just adds to increased diversification opportunities for any portfolio. Uniquely, most ETF/ETNs offer unleveraged exposure to these products as opposed to having to trade directly with futures contracts and leverage.

Our previous technical analysis methodology involved evaluating monthly charts. Commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Some contracts expire monthly and others quarterly. Some have serious seasonal characteristics inherent with these issues such as the seasonal nature of industrial expansion/contraction, global monetary policies and interest rates. Therefore, it pays to be active and utilize a combination of weekly and daily charts to manage risk.

Four risk factors should be considered:

  • The CFTC’s varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs - still in limbo.
  • The credit quality of ETNs given these are “notes,” many guaranteed by Barclay’s and Deutsche Bank.
  • Backwardation (back month contracts lower than front month) and contango (back months higher than front month) can negatively affect contract rollover for investors.
  • Since most commodities trade in dollars, the value of the dollar can positively or negatively affect price behavior.

Deutsche Bank features inverse and leveraged long/inverse ETNs for those investors wishing to hedge or speculate.

We rank the top 10 ETFs by our proprietary stars system as outlined below. In the case of base metals there are really only the top three for most investors to focus on. The rest would appear to be a little too targeted and atypical for investors. Further, the succeeding seven issues have seen large declines in assets under management and the danger always exists they fail as a business enterprise for the sponsor.

Strong established linked index

Excellent consistent performance and index tracking

Low fee structure

Strong portfolio suitability

Excellent liquidity

Established linked index even if “enhanced”

Good performance or more volatile if “enhanced” index

Average to higher fee structure

Good portfolio suitability or more active management if “enhanced” index

Decent liquidity

Enhanced or seasoned index

Less consistent performance and more volatile

Fees higher than average

Portfolio suitability would need more active trading

Average to below average liquidity

Index is new

Issue is new and needs seasoning

Fees are high

Portfolio suitability also needs seasoning

Liquidity below average

We feature a technical view of conditions from monthly chart views. We recommend longer-term investors stay on the right side of the 22 weekly simple moving average which is unique from other approaches given the high volatility in commodities and contract rollover with associated contango/backwardation issues. When prices are above the moving average, look to be long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues, preferring instead to buy when prices are perceived as low and sell for other reasons when high. But, this is not our approach.

#1: PowerShares DB Base Metals ETF (DBB)

DBB follows the DBIQ Optimum Yield Industrial Metals Excess Return Index that tracks futures contracts on aluminum, zinc and copper. The fund was launched in January 2007. The expense ratio is .75%. AUM (Assets under Management) equal $157 million and average daily trading volume is 127K shares. As of mid-December 2011 the YTD return was -21.65%

DBB Top 10 Holdings

Data as of December, 2011

  1. LME Copper Future Mar12: 43.86%
  2. LME Pri Alum Futr Sep12: 41.50%
  3. LME Zinc Future Jul12: 36.54%

#2: iPath Copper ETN (JJC)

JJC follows the Dow Jones-UBS Copper Subindex Total Return Index which includes the single high grade copper futures contract traded on the COMEX. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $131 million and average daily trading volume is 302K shares. As of mid-August 2011 the YTD return is -25%.

Holdings include rolling over the single high grade copper futures contract on the COMEX.

#3: ELEMENTS Rogers International Commodity Metal ETN (RJZ)

RJZ follows the Rogers International Commodity Index-Metals Total Return Index which represents the value of 10 commodity metals futures contracts and is a sub-index of the Rogers International Commodity Index. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $56 million and average daily trading volume is 48K shares. As of mid-December 2011 YTD return was -14.73%.

#4: iPath Nicket ETN (JJN)

JJN follows the Dow Jones-UBS Nickel Subindex Total Return Index that relates to the single commodity, nickel that trades on the London Metals Exchange. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $8 million and average daily trading volume is less than 5K shares. As of mid-December 2011 the YTD return is –28%.

Holdings include only the nickel commodity contract which trades on the London Metals Exchange (LME).

#5: iPath Dow Jones-UBS Lead ETN (LD)

LD follows the Dow Jones-UBS Lead Subindex Total Return Index which is a single-commodity sub-index currently consisting of one futures contract trading on the London Metals Exchange. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $5 million and average daily trading volume is 3.5K shares. As of mid-December 2011 the YTD return was -20%.

Holdings include the rolling over of a nickel futures contract at the London Metals Exchange (LME).

#6: iPath Pure Beta Lead ETN (LEDD)

LEDD follows the Barclay Capital Pure Beta TR Index which is comprised of a single exchange traded futures contract of lead, except during the contract rollover period the index may be comprised of two separate futures contracts. The issuer has the option to rollover contracts at various times away from any pre-determined schedule to enhance returns based on a proprietary methodology. The fund was launched in April 2011. The expense ratio is .75%. AUM equal less than $3 million and average daily trading volume is less than 2K shares. As a new fund investors are giving it some time to season and evaluate performance. But, as of mid-December 2011 the YTD return was -18%.

#7: iPath Aluminum ETN (JJU)

JJU follows the Dow Jones-UBS Aluminum Subindex Total Return Index which consists of a single-commodity futures contract trading on the London Metals Exchange. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $5 million and average volume is less than 2K shares. As of mid-December 2011 the YTD return was -24%.

#8: UBS Industrial Metals ETN (UBM)

UBM follows the UBS Bloomberg CMCI Industrial Metals Index Total Return Index which measures the collateralized returns from a basket of five futures contracts. These contracts are diversified across five constant maturities from three months up to three years. The fund was launched in April 2008. The expense ratio is .65%. AUM equal $5 million and average daily trading volume is less than 2.5K shares. As of mid-August 2011, the YTD return was -22%.

#9: PowerShares Base Metals Long ETN (BDG)

BDG follows the Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals Index which is composed of aluminum, zinc and copper. We admit that it’s difficult to ascertain the difference between BDG and DBB. The fund was launched in June 2008. The expense ratio is .75%. AUM equal only $1.5 million and average daily trading volume is less than 1K shares. (This may mean others are struggling to figure this out themselves.) Nevertheless, as of mid-August 2011, the YTD return is -17%.

#10: iPath Tin ETN (JJT)

JJT follows the Dow Jones-UBS Tin Subindex Total Return Index which includes and tracks a single-commodity futures contract trading on the London Metals Exchange. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $8 million and average daily trading volume is 2K shares. As of mid-December 2011 the YTD performance was -30%.

Clearly there are only a few from this list that merit the attention of most investors. What’s clear is base metals overall are forecasting slow or even negative economic growth. Further some ETFs within the list may or may not survive given low AUM as they lose money for sponsors from a business view.

It’s also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Charles Schwab’s ETFs and Scottrade’s Focus Shares which both are issuing new ETFs with low expense ratios and commission frees trading at their respective firms. These may also become popular as they become seasoned.

You may address any feedback to: feedback@etfdigest.com

Disclosure: The ETF Digest has no current positions in the featured ETFs. (Source for data is from ETF sponsors and various ETF data providers.)

Source: Top 10 Base Metals ETFs