Is Commodity ETF Slicing and Dicing Necessary?

Jan. 05, 2007 7:00 AM ETDBC, GSG, DBA, DBE, DBB, DBO, DBP, DBS, DGL
Richard Kang profile picture
Richard Kang
74 Followers

If there’s an area where commentary has exceeded that which is required, it has to be in the commodity complex. For every Jim Rogers on the bullish side there is more than likely an equally vocal counterpart on the other side. True to expectations, with such a hot sector, we have seen a decent share of commodity related ETFs, with certainly more than enough in the energy subsector.

Broad based commodity index ETFs [PowerShares DB Commodity Index TrackingFund (DBC) and iShares GSCI Commodity-Indexed Trust (GSG)] have allowed for a one-stop shotgun approach but now Deutsche Bank (DB) and PowerShares have sliced and diced yet another sector (follow the Deutsche Bank link) but, to me, this development does deserve merit.

What investors now have is the ability to fine tune their required commodity allocation instead of letting DBC and GSG do it. The new funds are:

  • PowerShares DB Agriculture Fund (DBA)
  • PowerShares DB Base Metals Fund (DBB)
  • PowerShares DB Energy Fund (DBE)
  • PowerShares DB Oil Fund (DBO)
  • PowerShares DB Precious Metals Fund (DBP)
  • PowerShares DB Silver Fund (DBS)
  • PowerShares DB Gold Fund (DGL)
  • Is this slicing and dicing really required?

    According to the factsheet for DBC on the DB Funds website, this is its breakdown:

  • 35% light sweet crude
  • 20% heating oil
  • 12.5% aluminum
  • 11.25% corn
  • 11.25% wheat
  • 10% gold
  • According to the iShares website, GSG, which tracks the GSCI Total Return Index, has a breakdown of:

  • 71% energy
  • 11% industrial metals
  • 11% agriculture
  • 5% livestock
  • 2% precious metals
  • The DBC factsheet also gives some information that should be of no surprise to the commodity index investor. The performance table shows 1 year returns as of September 30, 2006 of 9.32% for the DB Commodity Index, -21.14% for the GSCI and -6.11% for the DJ-AIG Commodity Index. This type of wide discrepancy is commonly found when comparing various hedge fund indices but not your more traditional indices. The problem is in the composition. I would strongly suggest that investors in this space read this feature article from IndexUniverse.com written by Matt Hougan titled “Choose Your Commodity Index Wisely". (The site requires membership which is free.) You’ll note that Matt’s article was written in May 2005 and the index breakdowns differ slightly from the data above but they’re not far off. Take special notice to the table at the end of his article that gives a nice comparison of the various indices and their breakdowns. Unfortunately, the DB Commodity Index was not one of the indices included in his analysis.

    There’s not a lot of trading history, so here’s the six month chart showing DBC and GSG:

    DBC GSG

    The general trends are similar but the gap is significant starting in early September when the lines diverge.

    Bottom line is that there’s little surprise that the GSCI had by far the worst performance of the three cited commodity indices due to its roughly three-quarters exposure to energy.

    Although I’m not as big an oil bull as I was one year or two years ago, longer term I’m still a bull. Recent news has suggested that the environment is as high a priority as any other to the average citizen. How will this play out in the energy/alternative energy space is a whole other blog entry. Whatever my call (or your call is), for sizeable portfolios and for sophisticated investors, DBC or GSG just can’t provide the precision required for adequate portfolio management. The commodity complex is just too broad a space to be managed with just a DBC or GSG position … aside for the very small sized portfolio.

    Clearly, the new PowerShares ETFs overlap considerably with existing ETFs. Still, we’re seeing what I believe to be the first exposure into the agricultural space. The base metals ETF allows for exposure to aluminum, zinc and copper which have gained considerable online chatter over the past few years. The energy ETF is similar to USO and provides for a more diversified instrument compared to its counterpart, DBO.

    To those that argue that the ETF market has, and continues to, “slice and dice” … I say their argument is strong for certain areas like the US equity market. In the case of the commodity complex, what Deutsche Bank and Powershares have brought to market is ideal.

    This article was written by

    Richard Kang profile picture
    74 Followers
    Richard Kang has the experience of over 25 New York Stock Exchange listed ETF launches since May 2009. Richard was one of three founders and Chief Investment Officer at Emerging Global Advisors LLC based out of New York City which issued and managed ETFs with underlying exposures in emerging and frontier markets. The firm was founded in September 2008 and its first ETFs were launched in May 2009. As of September 30, 2013, their emerging market consumer ETF was ranked #1 (out of roughly 600 open ended funds including actively managed mutual funds) based on risk adjusted returns. In 2016, Emerging Global Advisors was acquired by Columbia Threadneedle, the investment arm of Ameriprise Financial. Richard formerly blogged from 2006 to 2008 on everything about indexing and ETFs at The Beta Brief. In the fall of 2016, ten years after starting The Beta Brief, Richard launched The Fireside Chat, a blog that comments on the future and the impact from the emerging worlds of global investing, new technologies and the modern global citizen. A key objective is to provide new insights so as to find unique growth opportunities among these themes. Over his 20 years of buy-side experience, Richard has had senior roles at a hedge fund, fund-of-hedge fund and an investment counseling firm that was one of the world's first ETF strategist RIAs. He then pivoted to co-found both a US-based index provider and then an ETF issuer firm. Richard currently advises on a US domiciled ETF focused on the emerging market internet and e-commerce space as well as several early stage startups in the fintetch and social networking fields (and those where these areas converge). Richard has earned the Financial Risk Manager designation from the Global Association of Risk Professionals and has recently taught the “Fundamentals of Portfolio Management” course at NYU's School of Professional Studies. He sits on FTSE's Country Classification Indexing Committee as well as the editorial board of Institutional Investors' The Journal of Index Investing, the only academic journal for the indexing and ETF industry.

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