The Good, the Not-So-Bad and the Ugly Commodites ETFs

By Brad Zigler

You could say that it's the best of all possible worlds when the worst funds in an asset class crank out positive returns. That pretty much sums up the world of commodity ETFs.

The best of the seasoned commodity funds - that is, ETFs with a track record at least a year long - are above their 200-day moving averages by nearly 23%.

The Five Top-Performing Commodity ETFs (The "Good")

Name	Ticker	Holdings	% +/-200d MA
PowerShares DB Agriculture	DBA	Futures	+29.67
iShares Silver Trust	SLV	Physicals	+24.67
PowerShares DB Silver	DBS	Futures	+20.12
iShares COMEX Gold Trust	IAU	Physicals	+19.72
streetTRACKS Gold Shares	GLD	Physicals	+19.68
Average			+22.77

The wind has clearly been at the backs of precious metals funds, whether they hold physical metal or futures, which have been bested only by the senior agricultural futures portfolio.

When you think about it, not much separates the best and the worst commodity ETFs performance-wise. Broad-based commodity index ETFs like the iShares S&P GSCI Trust (NYSE Arca: GSG) and the PowerShares DB Commodity Index Tracking Fund (AMEX: DBC) occupy a middle ground, 15-18% above their 200-day moving averages.

Among the worst performers, only one portfolio - the bearish MACROShares oil fund - is actually in negative territory. Oddly, the complementary MACROShares bullish oil fund is also among the laggards. This seeming anomaly owes more to the construction of the portfolios than the performance of oil (see "Caveat Emptor").

The Five Worst-Performing Commodity ETFs (The "Not-So-Bad, Really")

Name	Ticker	Holdings	% +/-200d MA
MacroShares Oil Down	DCR	Treasuries/Repos	-6.69
PowerShares DB Base Metals	DBB	Futures	+2.40
MacroShares Oil UP	UCR	Treasuries/Repos	+4.08
Market Vectors Gold Miners	GDX	Stocks	+11.90
Market Vectors Steel ETF	SLX	Stocks	+14.54
Average			+5.25

The slackers roster holds another singular feature: it lists only one portfolio that actually holds commodity derivatives, a testament to the monolithic nature of the asset class.

And that's where the ugly comes in. Someday the commodities tower will topple, leaving imprudent investors who've overspent on commodities vulnerable to volatility at best, and deep losses at worst. No one knows for sure when the tide may turn against commodities, only that it will. Tread cautiously.

Comments

[Terry Finn]

Commodities Tower Toppling? Not anytime soon! As long as the governments are printing phony money and issuing $50 billion dollar credits here and there to all the crooked bankers and bond insurers there is not much to worry about. And what about the "Rating Agencies" calling pure junk triple "AAA". Are you seeing any of those guys going to jail? If you were an Arab sheik would you rather hold billions more of faux printing press money that is losing its value each day, or something real like corn, wheat, oil, soybeans, and gold. It's an easy choice as long as the politicians keep buying votes by promising MORE to the voters who are doing LESS. Check out the 10 year gold, silver or farm commodity chart for a dose of REALITY.

[forestgunk]

My father, a product of the Great Depression, always said, "Don't trust the bastards!!!” While corrupt politicians and the nations’ bankers print worthless currencies, the people soon catch on and return to a GOLD standard.

[Indexor]

Regardless of whether you are bullish or bearish on commodities, the reality is that this asset class has been trending to the upside for some time. In my humble opinion, common sense dictates 5-10% of a portfolio should be allocated here, if only to take advantage of the negative correlation. 5% could be placed into a broad-based ETF such as DBC, DJP or GSP and 5% in a more concentrated issue such as IAU, DBA, OIL etc. Of course, if you are more bullish, use techinal analysis or are comfortable closing out of reversing positions, those amounts could be tripled for as long as stocks and bonds continue deteriorating.

[ManagingEditor]

Thanks for your insights.

Look back on the article, though. It says: "SOMEDAY (emphasis added) the commodities tower will topple leaving imprudent investors who've OVERSPENT (again, added emphasis) on commodities vulnerable ..."

Note I haven't said WHEN the reversal of fortunes will occur. To think that commodities will remain in the ascendency indefinitely denies history. Commodities prices and inflation are cyclical, to wit:

Commodity vs. Stock Bull Markets

US Stock Market Producer Price Index
Composite (All Commodities)

1898-1920 61% 228%
1920-1929 196% -38%
1929-1951* -12% -58%
1951-1965 256% 6%
1965-1981 49% 204%
1981-2001 828% 37%

*Includes anomalous effect of the Great Depression (1929 – 1940)
(Source: Legg Mason)

Without market timing, overexposure to the asset class can be deleterious to a portfolio with a date-certain horizon. And how good are any of us in the timing department?


I'm not saying one SHOULDN'T have commodity exposure, only that the allocation be prudent.

[misterchan]

At the present time, it would seem that prudence in the realm of the NYSE is indicated. All the big boys are, and have been, for a few years, in denial about gold. And they will stay in denial for as long as gold is advancing and, whenever the tide turns, no matter if it takes 10 years, they will smile with their cold Wall Street smiles and say, "See, I told you so. You should have listened to me." And they will be happy. But, so will we. Because we will all have beaten the Dow Jones. And cashing in our gold bars, coins, etc.

[granger]

RJI is my choice for balanced exposure

[sbenard]

I had noticed this phenomenon with UCR and DCR -- that it didn't accurately track the prices of crude oil. Until today, I didn't know why. I just knew that it occurred. I think I'll just forget these two ETFs then. USU works just fine, and has a tighter spread. Thanks for the info.

[ManagingEditor]

No worries. UCR and DCR are novelties as far as oil ETFs/ETNs go. They're issued in tandem as complementary sides of a trust made up of credit instruments.

When you deal with the MacroShares products, you're taking on a huge tracking error risk. Tracking spot WTI can be hard enough for "old-fashioned&qu... oil ETFs/ETN when the market's in contango.