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Bottom Fishing with These Commodity ETFs?

Zacks Equity Research

After a stretch of awful nine months, broad commodities started to put themselves in order from the start of the fourth quarter. Most commodities ETFs were in green in early October on an unexpected strength from a weaker dollar, rebounding oil prices and stabilization in the key commodity-consuming nation China that brightened the lure for commodities.

Dollar strength, supply glut, relentless economic turmoil in China and faltering global growth have been nagging botheration for the commodities this year.  Notably, a rising U.S. currency makes dollar-denominated assets more expensive to foreign investors, thereby dulling the appeal for the commodities.  

As a result, the broader commodity market, as represented by the S&P GSCI Total Return is down 17.6% so far this year (as of October 12, 2015) and has tagged itself the worst performing asset class this year.

Soft Job Data = Weak Dollar

However, with a downbeat U.S. job report, global growth concerns and a subdued inflationary outlook on the backdrop, all talks about the Fed lift-off cooled off instantly. The tentative timeline of the Fed rate hike has been pushed to early next year and the greenback fell from its prior height for a valid reason. This ushered gains for the broader commodity market.

To add to this, the commodities behemoth Glencore Plc’s announcement that it will close its supply of many actively traded commodities from zinc to copper also boosted trading in the space. Commodities approached the biggest weekly gain in three years in the week ended October 9.

Commodities Yet to Hit Bottom?

Several analysts were of the opinion that the worst for commodities may be over. Having slid for over four years, commodities are now offering a cheap valuation. The S&P GSCI Total Return index was down 38.3% in the last one-year frame, 19.3% down in the three-year frame and down 9.9% in the five-year frame (as of October 12, 2015). As per Market Realist, if we go by the Bloomberg Commodity Index, the asset class is off around 50% from high it hit in 2011.

Still, investors should note that the recent bounce in the space appears short term in nature. The relative strength index of GSCI Commodity-Indexed Trust Fund (GSG) currently stands at 51.06 indicating that the product is yet to enter an oversold territory. Fundamentally, the global economy is yet to stand on its own feet, indicating a still weak demand profile for commodities.

China: A Pain in the Neck

Just as the commodities took off, the Chinese economy started hitting downbeat data points all over again. The country’s trade numbers for September might have come in slightly better than expected; yet they showed that growth momentum is on the line. Plus, the economy’s September inflation turned out softer than expected (read: What is in Store for Industrial Metal ETFs After China Rout?).

Moreover, the greenback might have taken a pause, but would get back its lost strength once the lift-off talks return with full forces. Further most commodities like gold and silver act as hedges against inflation, which is presently subdued globally and posing as a headwind for commodities.

Thus, it would be foolish to say that bad patch is over the commodities space as ominous clouds are still hanging above. Still investors having a strong stomach for risks might try bottom fishing and ride out near-term tailwinds. After all, there are some metal and the related ETFs which offer great protection against market volatility and come out as safe havens. These metals could be good picks if the market remains edgy for some more time.

For them, we highlight three commodity ETFs below that could act as better plays in the current market.

SPDR Gold Trust ETF (GLD)

Gold is often viewed as a safe haven asset to protect against financial risks, and has performed well lately (despite deteriorating fundamentals) on heightened market volatility. GLD tracks the price of gold bullion measured in U.S. dollars.

The fund is the most popular and liquid bet in its space with an asset base of $25.7 billion and an average trading volume of over six million shares a day. It charges 40 basis points as fees. This gold bullion fund was up about 5.3% in the last one month. The fund has a Zacks ETF Rank #3 (Hold) (read: 3 Safe-Haven ETFs to Watch on Market Correction).

Silver Trust (SLV)

Silver has an edge over the gold as the white metal is used in a number of key industrial applications. This metal is also viewed as an alternative investment to risky assets during economic uncertainty.

The fund tracks the price of silver bullion measured in U.S. dollars. This ultra-popular silver ETF is worth over $5 billion and has heavy volume of nearly 5.8 million shares a day. It charges 50 bps in fees per year from investors. SLV was up over 9.9% in the last one month. The fund has a Zacks ETF Rank #3.
Global Tactical Commodity Strategy Fund (FTGC)
This $204.4 million-ETF is an actively managed broader commodity ETF. It charges 95 bps in fees and has high exposure in silver, wheat, cattle feeder, lean hogs, cocoa, coffee and sugar. Notably, most of these commodities are presently witnessing an uptrend in prices making the product an intriguing play even in a rough commodity trading environment. The fund added over 3% in the last one month (read: Is Sugar The Best Commodity ETF Right Now?).
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