For ETFs, First Half of 2008 Was All About Commodities

The explosive growth of the exchange-traded-products industry in the U.S. over the past few years means that there's an exchange-traded fund or exchange-traded note for just about anything.

Want to buy big U.S. stock indexes like the S&P 500 or the Russell 2000? Try the S&P 500 SPDR (SPY) or the iShares Russell 2000 ETF (IWM). Interested in foreign equities? You can buy developed markets (EFA), emerging markets (VWO) or almost any country-specific index you want (Japan, China, Brazil, Russia, etc.).

And it's not just stocks. You can buy bonds of all types - real estate, currencies, commodities and other alternative assets. There are now more than 790 ETFs and ETNs on the market, and you can buy access to just about anything.

Given such a wide array of products, examining the relative performance of ETFs is an easy way to determine the relative performance of various asset classes. With the first half of the year behind us, now's a good time to do just that.

First Half 2008 In Review

We all know that the first half of 2008 was a brutal period for the equity markets. The S&P 500 closed down more than 12%, and foreign stocks didn't do much better - the MSCI EAFE Developed Markets Index was down nearly 11%, for instance.

What was up? In a word: commodities.

Get this: If you exclude the so-called "inverse" ETFs - ETFs that are designed to go up when the market goes down - the 39 top-performing ETFs over the first six months of the year were ALL either commodity or natural resource funds.

You have to go all the way down to #40 before you hit the CurrencyShares Australian Dollar ETF (FXA), which posted a 12.33% return.

The table immediately below lists the top-10-performing ETFs over the first half of the year, excluding the inverse ETFs, and it's obvious that commodities rose to the top. 

Top-10-Performing ETFs - 1H 2008	Ticker	1-Mo	3-Mo	YTD
United States Natural Gas	UNG	13.29	28.43	73.19
iPath DJ AIG Nat Gas ETN	GAZ	13.86	29.7	73.12
iPath DJ AIG Energy ETN	JJE	10.64	34.92	55.18
United States 12 Month Oil Fund	USL	11.59	44.14	55.02
PowerShares DB Energy Fund	DBE	10.64	39.54	54.64
PowerShares DB Oil Fund	DBO	12.4	41.39	52.67
ELEMENTS Rogers Energy ETN	RJN	10.07	38.4	50.98
iPath GS Crude Oil TR ETN	OIL	9.75	38.91	49.79
United States Oil	USO	9.91	39.33	49.47
DB Commodity Index	DBC	11.74	25.18	42.84

Source: Morningstar. Data as of 6/30/2008.

For comparison, the next table shows the 10 worst performers. Clearly, it was not a good time to be invested in Financials, which, broadly defined, captured six of the bottom 10 slots. India also had a rough first half, with the iPath MSCI India Index falling 42%. 

Bottom-10-Performing ETFs - 1H 2008	Ticker	1-Mo	3-Mo	YTD
Claymore/Clear Global Exchange	EXB	-14.23	-11.45	-30.55
PowerShares FTSE RAFI Financials	PRFF	-19.95	-20.23	-31.07
Claymore/AlphaShares China Real Estate ETF	TAO	-15.90	-11.01	-31.16
iShares DJ Financial Services	IYG	-19.78	-19.79	-31.39
SPDR KBW Cap Markets	KCE	-13.15	-9.91	-32.60
PowerShares HY Div Achievers	PEY	-18.32	-25.96	-32.91
SPDR KBW Bank	KBE	-24.01	-26.47	-33.72
First Trust DJ STOXX 30	FDD	-19.45	-25.72	-34.18
iShares DJ Broker Dealer	IAI	-16.32	-10.70	-34.80
iPath MSCI India Index	INP	-19.90	-20.16	-42.00

Source: Morningstar. Data as of 6/30/2008. 

Asset Class Comparison

We can get a general feel for the performance of various asset classes by examining the performance of the largest ETFs or ETNs in each major group. Here again, commodities (and other alternatives) rise to the top. The leading broad-based commodity product, the iPath DJ-AIG Commodity ETN, returned a sharp 27.09% so far this year, followed by gold (GLD), up 10.98% and the euro (FXE), up 9.68%. Fixed income managed nearly flat returns, while all major stock categories tumbled.

The spread between broad-based commodities and U.S. stocks in our study is nearly 30%. In just six months! That's diversification at work. 

Major ETF Asset Class YTD Performance Comparison Through July 1, 2008
Category	Fund	Ticker	1-Mo	3-Mo	YTD
Commodities - Broad	iPath DJ-AIG Commodity ETN	DJP	9.14	16.06	27.09
Commodities - Gold	SPDR Gold Trust	GLD	4.98	-0.46	10.98
Currency	Euro Currency Trust	FXE	1.48	0.48	9.68
Fixed Income	iShares Lehman Aggregate	AGG	0.05	-1.08	1.24
Emerging Markets	iShares MSCI Emerging Markets	EEM	-9.07	2.16	-9.5
Foreign Developed Markets	iShares MSCI EAFE	EFA	-8.09	-2.27	-10.88
U.S. Stocks	S&P 500 SPDR	SPY	-8.87	-3.21	-12.37

Source: Morningstar. Data as of 6/30/2008.

Of course, not all commodities performed equally well. According to IndexUniverse.com, there were 33 commodity-focused ETFs and ETNs in existence on January 1, 2008. Their performance since then is listed below.

Year-to-Date Performance Of All Commodity Funds Through July 1, 2008
Name	Ticker	1 Mo	3 Mo	YTD
United States Natural Gas	UNG	13.29	28.43	73.19
iPath DJ AIG Nat Gas ETN	GAZ	13.86	29.7	73.12
iPath DJ AIG Energy ETN	JJE	10.64	34.92	55.18
United States 12 Month Oil Fund	USL	11.59	44.14	55.02
PowerShares DB Energy Fund	DBE	10.64	39.54	54.64
PowerShares DB Oil Fund	DBO	12.4	41.39	52.67
ELEMENTS Rogers Energy ETN	RJN	10.07	38.4	50.98
iPath GS CrOil TR Idx ETN	OIL	9.75	38.91	49.79
United States Oil	USO	9.91	39.33	49.47
DB Commodity Index	DBC	11.74	25.18	42.84
GS Connect S&P Enhanced Commodity Total Return Str	GSC	9.31	28.99	41.52
iPath GSCI TotRet Idx ETN	GSP	9.24	28.73	41.37
iShares GSCI Commodity Id	GSG	8.42	28.2	40.61
ELEMENTS Rogers TR ETN	RJI	9.54	17.98	28.79
iPath DJ AIG Copper ETN	JJC	7.72	1.58	28.26
iPath DJ-AIG Commodity	DJP	9.14	16.06	27.09
iPath DJ AIG Grains ETN	JJG	17.1	18.54	25.96
PowerShares DB Agriculture Fund	DBA	15.6	11.95	24.46
iShares Silver Trust	SLV	4.7	-2.02	19.28
iPath DJ AIG Agric ETN	JJA	14.92	14.9	19.27
PowerShares DB Silver Fund	DBS	5.55	0.88	15.43
iPath DJ AIG Metals ETN	JJM	4.76	-3.94	14.43
PowerShares DB Base Metals Fund	DBB	5.1	-1.66	13.32
ELEMENTS Rogers Metal ETN	RJZ	4.27	-4.72	12.43
ELEMENTS Rogers Agric ETN	RJA	12.22	8.51	11.6
SPDR Gold Trust	GLD	4.98	-0.46	10.98
iShares COMEX Gold Trust	IAU	4.34	0.98	10.71
PowerShares DB Precious Metals Fund	DBP	5.34	0.68	10.46
PowerShares DB Gold Fund	DGL	5.32	0.5	9.18
iPath DJ AIG Livestock ETN	COW	-3.58	7.95	-8.51
iPath DJ AIG Nickel ETN	JJN	-0.38	-26.29	-16.93
Claymore/Clear Global Timber ETF	CUT	-13.23	-8.76	-19.83

Source: Morningstar. Data as of 6/30/2008.

There's a lot to take in on that chart, but it's worth highlighting a few facts.

On the upside, the story is all energy, with natural gas leading the way. The 73% first-half return of the United States Natural Gas ETF (UNG) is one of the better six-month performances by an ETF ever, and reflects sharply rising natural gas prices.

On the flip side, you can see that not all was well in the commodities world: three products - the iPath DJ AIG Livestock ETN (COW), the iPath DJ AIG Nickel ETN (JJN) and the Claymore/Clear Global Timber ETF (CUT) - delivered negative returns for the period.

Each had its own particular reason. Livestock has been the laggard in the commodities boom over the past few years, and it's had a tough start to this year as well. Corn prices have soared so high that ranchers are slaughtering their cattle and pigs early, creating an excess supply at the slaughterhouses.

The nickel market, meanwhile, pulled back this year from what many believe was a speculative bubble at the tail end of 2007, when nickel prices went up and up, as a temporary shortage of metal worked its way through the system.

Finally, you have CUT, which is not a direct commodity product; rather, it holds a variety of companies involved in various aspects of the timber market. The criticism of CUT is that its link to timber prices is indirect at best, and that it really performs more like a stock than like a commodity play. The fund's first-half performance agrees with this assessment.

Broad-Based Commodity ETFs And ETNs

One final chart: We've mentioned time and again that the various broad-based commodity indexes are not created the same. To prove that, I've pulled together the YTD performance of the six major broad-based commodity ETFs and ETNs with at least six months of performance data.

Notice the huge performance gap between the first four ETFs and the last two. That's explained by the fact that the top four ETFs all have heavy weightings in energy, which has performed very well in the first half of the year. The bottom two ETFs - the ELEMENT Rogers (RJI) and DJ-AIG (DJP) - have more balanced exposure, and have suffered from their relatively light weights on energy. 

Name	Ticker	1 Mo	3 Mo	YTD
DB Commodity Index	DBC	11.74	25.18	42.84
GS Connect S&P Enhanced Commodity Total Return	GSC	9.31	28.99	41.52
iPath GSCI Total Return Index ETN	GSP	9.24	28.73	41.37
iShares GSCI Commodity Index	GSG	8.42	28.20	40.61
ELEMENTS Rogers Total Return ETN	RJI	9.54	17.98	28.79
iPath DJ-AIG Commodity ETN	DJP	9.14	16.06	27.09

Source: Morningstar. Data as of 6/30/2008.

Comments

[A.S.D.]

Does anyone have any comments to share re Banro (BAA)?

[Whidbey]

This must be gosh of me, but given all the tables do you have a clue on where things might be headed? Like the leaders are in a fade and the new leaders are still aborning. Hope this is not taken a criticism, but it is kinda.