Back on January 5th of this year, PowerShares and partner Deutsche Bank launched seven new commodity ETFs as shown in the table below. After almost six months, now seems to be a good time to check in on them to see how they have fared.
Like most of other ETFs where commodities are the underlying investment, all of these funds purchase futures contracts and, before they expire, existing contracts are sold and new ones are purchased to replace them (a futures contract is an obligation to buy or sell "a certain underlying instrument at a certain date in the future, at a specified price").
This is referred to as "rolling" the contracts and, with each contract "roll", comes the potential for gains or losses based on the difference in price between the contract being sold and the contract being purchased. This difference results in what is called the "rolling yield" and benefits investors when the purchase price of a new contract is less than the sale price of the expiring contract, a condition known as "backwardation". The opposite condition, "contango", works against investors.
Unlike some other products, the PowerShares funds implement a method of rolling contracts aimed at potentially maximizing the roll benefits in backwardated markets and minimizing the losses in contangoed markets. Rather than selecting the next contract month as a replacement, these funds choose one of the next thirteen months based on which one generates the best possible "implied roll yield" (see the funds' prospectus for more details).
Since futures contracts cost only a fraction of the price of the underlying commodity, excess funds are invested in debt instruments, typically treasuries, to offset expenses and management fees. Dividends are paid to shareholders on a regular schedule based on these excess earnings.
First looking at the two energy funds - PowerShares DB Energy (AMEX:DBE) and Oil (AMEX:DBO) - it is clear that they've outperformed the two existing futures-based crude oil ETFs - United States Oil (AMEX:USO) and iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE:OIL).
While the better performance of the broader energy fund (DBE) can be easily explained by the heftier year-to-date price increases for gasoline, heating oil, and natural gas (up between 20 and 40 percent while crude oil has gained about 13 percent) the reason for the difference between DBO and the existing crude oil ETFs is less clear.
The "optimum yield roll" strategy employed by Deutsche Bank may explain the better performance - about a three percentage point difference based on the chart above - though there appears to be some confusion over the exact difference in performance (see here and here).
The funds clearly diverged in May at a time of the month when contracts are sold and repurchased - whatever happened at that time leaves the PowerShares oil fund well clear of the other two and offers a strong (but still preliminary) case for these funds becoming more popular over time, particularly for long-term, buy-and-hold retail investors.
Note that with an average volume of about 50,000 shares per day, the PowerShares energy funds trade at but a tiny fraction of the USO fund daily volume that sees over three million shares change hands (a strong argument for being first to market). The volume for the iShares fund averages about 150,000.
Two other oil funds exist - Claymore MACROshares Oil Up Tradeable Trust (AMEX:UCR) and Oil Down Tadeable Trust (AMEX:DCR) - and the Oil Up fund has outperformed all of the funds above. This, however, is an entirely different type of product that makes no investment in crude oil, but rather, works in conjunction with the Oil Down fund moving money from one fund to another based on the price of crude oil. An interesting product to be sure and perhaps a subject for another day.
It is important to note that the existing precious metal funds - StreetTRACKS Gold Shares (AMEX:GLD), iShares Comex Gold Trust (AMEX:IAU), and the iShares Silver Trust (AMEX:SLV) - all hold physical bullion rather than futures contracts. The value of the fund, therefore, is subject to storage and handling fees related to the physical commodity in addition to normal fund management fees and expenses.
A closer look at the performance of the funds above shows that, so far, there is little difference between the two approaches to precious metals ETFs - any difference in performance remains obscured by the normal volatility in determining the daily closing value, the performance of one fund relative to another being dependent on the specific time period of the comparison.
Once again, the first product to market gets the lion's share of the trading volume as demonstrated by the wildly popular StreetTRACKS GLD gold fund with an average daily volume of over 4 million shares. Similarly, the first-of-its-kind silver bullion ETF from iShares sees almost a half million shares traded every day.
The volume for the iShares IAU gold fund is only about 150,000 shares and, as might be expected, trading for the new PowerShares precious metals ETFs trail all the existing products by a wide margin at between 10,000 and 20,000 shares per day.
It's not clear what minimum level of share volume is necessary to keep a fund operating - with stiff competition from entrenched products and offering no clear advantage so far, the longevity of these funds may be questionable.
Agriculture, Base Metals, and the Original DB Fund
Two of the most interesting recent offerings in the world of commodity investments have been the combination funds for agriculture and base metals - PowerShares DB Agriculture (AMEX:DBA) and Base Metals (AMEX:DBB).
Also shown below is the original Deutsche Bank Commodity Index Tracking Fund (AMEX:DBC) which is now almost a year and a half old - it is heavily weighted toward energy (55 percent) along with about equal parts of corn, wheat, aluminum and gold.
All three of these funds show double-digit gains or better since their inception - the original DBC fund is now up 13 percent since its launch last year after factoring in dividends paid. When comparing funds such as these, it is important to include the dividend payments which are not normally reflected in most charting tools (no dividends have been paid for any of the funds shown in any of the charts above).
Trading volume for both the original DBC fund and the new agriculture fund are both almost 300,000 shares per day while the base metals fund sees only about one-fifth that amount. The agriculture fund has been popular due to steadily rising corn and wheat prices while many investors appear to be overly-cautious about wading into base metal investments after a spectacular rise last year and talk of a bursting commodity bubble led by copper prices.
As shown in the charts above, there has been no "bursting" in any commodity markets this year and, with crude oil looking like it is about to retake the $70 level, much higher prices may be ahead.
Overall, this is a very good family of funds from PowerShares/Deutsche Bank. With these products, retail investors can now confidently participate in the long-term commodity bull market, diversifying their portfolio away from equities to whatever extent they are comfortable.
Historical studies have shown that commodities typically outperform equities as economic growth slows and recessions near, something that may be in store later this year or early next year as the slumping housing market continues to weigh on the U.S. economy.
Full Disclosure: Long DBE, SLV, DBA, and DBC at time of writing.