Industrials metals have been the commodities investment over the past ten years. A look at trailing returns for the DJ-AIG Total Return commodity sub-sectors tells the tale. No matter how you slice it, Industrial Metals have offered the highest annualized returns of any sector of the commodities market.
It’s no big surprise. If prices in the commodities sector are driven by demand --- and the rapid growth of the developing world is driving the horse --- then the brunt of this demand will be felt first in industrial metals, the building block of development. The commodities news page at Bloomberg confirms this theory, with articles every day on surging prices in the commodities space. Today, the page is talking about continued nickel shortages and lead prices hitting record highs.
For U.S. investors, the most obvious way to access the metals space is through the PowerShares Deutsche Bank Base Metals Fund (AMEX: DBB), the only dedicated ETF holding base metal futures. The fund has performed well since launching in January, rising more than 6 percent in just under three months.
One often overlooked factor in the fund, however, is that it is extremely focused, holding just three commodities: copper, aluminum and zinc. That’s worth noting because the three top performing industrial metals this year are (in order) nickel, tin and lead; copper, aluminum and zinc trail. Of course, DBB doesn’t even consider steel, as there is no market for steel derivatives yet. Steel plays a big role in any development project, and the equity-based AMEX Steel Index is up over 18 percent year-to-date.
Industrial metals could stay hot for some time. Producers are looking for ways to substitute alternatives for pricey metals like nickel, but those efforts are limited by the practicalities of the alternative products. Ultimately, capacity is limited and demand continues to grow. Investors, however, should know what they are buying, and understand that each product has its own supply/demand quirks. Broad exposure across multiple markets may be the best idea of all.