Though broad commodities started 2014 on a strong note, they appear to be losing steam of late. Commodities like natural gas, gold, silver, cocoa and coffee have been on a tear posting incredible gains from a year-to-date look, while others like wheat, tin, aluminum and copper have seen extreme weakness.
This is largely thanks to supply/demand imbalances and global developments. Macro fundamentals in developing nations have been out of investors’ favor of late thanks to emerging market weakness and signs of a slowdown in the world’s second largest economy that have raised concerns over global economic growth.
Further, the Fed reduced an additional $10 billion in the U.S. monetary stimulus plan at the two-day meeting recently, leading to more capital outflows from the emerging markets and boosting the U.S. dollar. The surge in the dollar has taken a toll on the commodity market too, sending some funds lower (read: Is the Worst Over for These Emerging Market ETFs?).
In such a backdrop, there are still some winners that are poised to perform better than others going forward. Below, we have highlighted three commodity ETFs that could act as better plays in the current market and have a bullish outlook:
ETFS Physical Platinum Shares (PPLT)
Platinum could be well-positioned for solid returns this year due to falling supply and rising demand. The supply of platinum is going through certain disruptions due to the labor unrest in South Africa, continued labor issues in some of the other biggest suppliers of platinum and diminishing stockpiles in Russia.
As supplies begin to dip, demand is growing largely thanks to surging automobile sales both in the U.S. and in Europe. In addition, industrial demand in Asia and the Middle East, and jewelry demand in China, Europe, North America and India are also increasing (read: Why Platinum ETFs Are Poised for More Gains).
The best way to play this trend is with the popular PPLT, which has over $724 million in AUM. This fund seeks to track the performance of the price of bullion platinum, before Trust expenses. This is the largest and the only physically backed platinum ETP and kept in Zurich or London in plate and ingot form under the custody of JP Morgan Chase Bank.
The product sees light volume of around 36,000 shares a day and charges 60 bps in fees per year from investors. The ETF added about 1.3% in the year-to-date period and has a Zacks ETF Rank of 2 or ‘Buy’ rating.
ETF Securities Physical Palladium Shares (PALL)
In the precious metal space, palladium could also be considered an extremely lucrative investment avenue given its growing demand and decreasing supply. The white metal will likely suffer from some of the same supply problems like platinum.
On the other hand, the boom in the auto industry and a growing consumption of palladium in cell phones, computers and jewelry should provide a nice boost to the demand (read: Robust Car Sales Bring Auto ETF in Focus).
As a result, global supply is expected to outstrip demand in the years to come, thereby driving up the palladium price. Investors looking to take advantage of this possible price rise should focus on PALL which is the only pure play in the space.
The fund seeks to match the spot price of palladium, net of fees and expenses. With AUM of $511.3 million, PALL owns palladium bullion in plates or ingots kept in Zurich or London under the custody of JPMorgan Bank. The product has an expense ratio of 0.60% and sees moderate volume of more than 61,000 shares a day.
The ETF added about 1.1% so far in the year, but has the potential to move higher given palladium specific factors. PALL has a Zacks ETF Rank of 3 or ‘Hold’ rating (see: all the Precious Metals here).
iPath Dow Jones-UBS Nickel Subindex Total Return (JJN)
Among the industrial metals, nickel prices have shown an impressive comeback of late and this trend will likely continue in the coming months. This is especially true as the ban on ore exports by Indonesia would reverse the excessive oversupply situation and the demand from alloy industries is on the rise.
Investors seeking to ride out the upcoming surge in nickel prices could play with JJN. The ETN is up about 5.5% year-to-date, and it has the potential to outperform other commodities given that the product has a Zacks ETF Rank of 2 or ‘Buy’ rating (read: Why Nickel ETFs Might Be a Great 2014 Investment).
The note tracks the Dow Jones-UBS Nickel Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on nickel and currently consists of one futures contract on the commodity.
The product is a bit expensive as it charges 75 bps in fees per year. It trades in a paltry volume of less than 7,000 shares on an average daily basis. The ETN is also unpopular and has attracted just $4.7 million in AUM.
The trio is clearly outpacing the broad commodity fund – PowerShares DB Commodity Index Tracking Fund (DBC) – by a wide margin. This trend might continue in the future if emerging markets show some signs of improvement and favorable demand/supply fundamentals continue to exist.
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