As the ETF industry continues its rapid development, investors can now gain cheap and easy access to nearly every corner of the investable universe, including the previously hard to reach commodities market. For many years, commodity trading was reserved for only highly-skilled futures traders. But now the evolution of the ETF world has democratized this asset class, allowing average investors to place their bets on this lucrative corner of the market. From hyper-targeted products that track a single futures contract to funds that cast a wider net over the space, investors can choose from multiple commodity ETF options. [see 101 ETF Lessons Every Financial Advisor Should Learn].
Broad Commodity ETPs: Under the Hood
These broad-based ETPs can be a great opportunity for investors looking to gain a less volatile view of the commodity sector. However, a closer look at the holdings reveals a strong tilt towards energy futures in many of the “diversified” commodity ETPs [try our Free ETF Head-To-Head Comparison Tool].
Though the energy market has certainly provided investors with some lucrative returns over the years, such a heavy tilt towards this sector may not always be beneficial. Since energy futures are inherently volatile, ETPs that are heavily invested in the commodity can exhibit significant price movements in a relatively short time frame [also check Dividend.com's Money Management Tips Center].
The chart below compares the total allocation to energy futures, along with the three-year returns among six popular broad commodity ETPs, revealing significant differences between them:
- DB Commodity Index Tracking Fund (DBC, A+)
- DJ-UBS Commodity Index TR ETN (DJP, B+)
- S&P GSCI Total Return Index ETN (GSP, A)
- Roger Intl Commodity ETN (RJI, B+)
- Continuous Commodity Index Fund (GCC, B-)
- E-TRACS UBS Bloomberg CMCI ETN (UCI, A)
Of course, there’s no universally right choice from the above ETFs, but investors should be mindful of the composition of these “diversified” commodity products. Investors who want to learn more about the tactics behind energy investing should check out 15 Different Ways To Invest In Energy With ETFs.
Disclosure: No positions at time of writing.
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