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How Are The PowerShares Commodity ETFs Doing?

Jun. 22, 2007 10:15 AM ETDBA, DBE, DBB, DBO, DBP, DBS, DGL
Tim Iacono profile picture
Tim Iacono
51.79K Followers

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").

commodity ETFs

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.

Energy

First looking at the two energy

This article was written by

Tim Iacono profile picture
51.79K Followers
Tim Iacono is the founder of the investment website 'Iacono Research', a subscription service providing market commentary and investment advisory services specializing in natural resources. He also writes a financial blog known as 'The Mess That Greenspan Made', a sometimes irreverent look at the many and varied after-effects of the Greenspan term at the Federal Reserve. Use the links below to visit Tim's website/blog.

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