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Commodities Enter Bull Market: 6 ETF Winners

Sweta Killa

Broad commodities saw a strong start this year and are clearly outperforming global equities and bonds, indicating that the five-year bear market for commodities has finally come to halt. Notably, the Bloomberg Commodity Index, which tracks returns from 22 raw materials, is up over 11% compared to gains of 6% for the global bond market and over 2% for equities from a year-to-date look.

Commodities gained over 20% from the lowest level it touched on January 20, reflecting that the index has entered a bull market. This represents the best start since the notorious commodities’ price spike of 2008. Recovering macro fundamentals, tight supply conditions and rising global demand along with a delay in rate hike boosted prices of a wide range of commodities including oil, sugar, gold, soyabeans and zinc. Moreover, the raised forecast by Citigroup last month for commodities such as gold, oil and grains amid a stabilizing China, the world’s largest consumer of raw materials, added strength.

In particular, oil price jumped to $50 per barrel from the 12-year low of $27 hit in mid-February amid disruptions in Nigeria and Venezula as well as reduced output in U.S. and many other producers. Additionally, bullish comments from Goldman infused further optimism into the global market (read: Two Ways to Tap Rising Oil Prices with ETFs).

Zinc is the best performing industrial metal this year buoyed by cutbacks in mines and a deficit in the concentrate market. Additionally, precious metals like gold and silver are the strongest performers this year as global concerns and a retreat in the U.S. dollar bolstered demand for precious metals as stores of value. On the agricultural front, soyabeans consumed in cooking oil and livestock feed have jumped 33% and 58%, respectively, this year as floods in South America damaged crops and dry weather hurt U.S. output.

As a result, the most popular commodity fund – PowerShares DB Commodity Index Tracking Fund DBC – which tracks a broad basket of the 14 most heavily traded commodity futures contracts has pumped in $228.5 million so far this year after witnessing huge outflows of $1 billion last year, as per ETF.com (see: all the Broad Commodity ETFs here).

Given this, we have highlighted the five top performing ETFs from various corners of the commodity market that have delivered outstanding returns so far this year. Any of these could be excellent plays for investors seeking to ride out the current bullishness in the space.

iPath Pure Beta Sugar ETN SGAR – Up 28.8%

This note seeks to match the performance of the Barclays Sugar Pure Beta Total Return Index. Unlike many commodity indexes, this product can roll into one a number of futures contracts with varying expiration dates, as selected by using the Barclays Pure Beta Series 2 Methodology. This approach might result in less contango, which could prove beneficial, as shifting from month to month in contracts can eat away returns in an unfavorable market situation. The note is illiquid with a paltry volume of under 1,000 shares and unpopular with AUM of just $1.2 million. Expense ratio comes in at 0.75%. However, SGAR has a Zacks ETF rank of 4 or ‘Sell’ rating with a High risk outlook (read: What Pushed Up These Agricultural ETFs?).

United States Diesel-Heating Oil Fund UHN – Up 26.5%

This ETF tracks the movement of heating oil prices. It is unpopular and illiquid in the oil space with AUM of 3.9 million and average daily volume of under 3,000 shares. The ETF has 0.60% in expense ratio.

United States Brent Oil Fund BNO – Up 24.9%

BNO provides direct exposure to the spot price of Brent crude oil on a daily basis through futures contracts. It has amassed $132.2 million in its asset base and trades in solid volume of more than 308,000 shares a day. The ETF charges 75 bps in annual fees and expenses (read: Best Oil Rally in 7 Years; 3 Energy ETF Winners).

Teucrium Soybean Fund SOYB – Up 20.3%

Unlike many commodity ETFs, this product doesn’t just cycle into the next month as expiration approaches. Rather it utilizes a much more in-depth approach that reduces the effects of backwardation and contango. The product uses three futures contracts for soybeans, all of which are traded on the CBOT Futures Exchange. The three contracts include the second-to-expire contract weighted 35%, the third-to-expire contract weighted 30%, and 35% weighted contract expiring in the December following the expiration month of the third-to-expire contract.

The fund has amassed $13.3 million in its asset base and trades in a lower volume of about 16,000 shares a day. The product is the high cost choice in the agricultural space as it charges a fee of 3.41% per year. The ETF has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating with a High risk outlook.

iPath Bloomberg Grains Subindex Total Return ETN JJG) – Up 19.2%

The product follows the Bloomberg Grains Subindex Total Return, which delivers returns through an unleveraged investment in three futures contracts on grains commodities – corn, soybeans and wheat. The ETN has been able to manage $124.8 million in AUM and trades in moderate volume of roughly 63,000 shares per day. Expense ratio comes in at 0.75%. BAL has a Zacks ETF Rank of 4 with a High risk outlook.

ETFS Physical Silver Shares SIVR – Up 19%

This fund has AUM of $298.1 million and trades in moderate volume of around 92,000 shares per day on average. It tracks the performance of the price of silver less the Trust expenses and is backed by physical silver under the custody of HSBC Bank USA in London. Expense ratio comes in at 0.30%. SIVR has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: ETF Areas Beating S&P 500 QTD).

Bottom Line

The recent trends have been encouraging for commodity ETFs, though many of them have a Zacks Rank that is not favorable. Investors could consider these for a near-term play on commodities that are enjoying a huge run-up in their prices.

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