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A Commodities ETF Shows Some Promise

ETF Professor

Although the dollar has been one of this year's worst-performing major currencies, some commodities are struggling as well. However, some diversified commodities exchange-traded funds are showing signs of life.

For example, the $1.82 billion PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) has recently been trading higher and is up more than 8 percent off its July lows. DBC, which has been trading for more than 11 years, follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return.

“The Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. The Fund and the Index are rebalanced and reconstituted annually in November,” according to PowerShares.

Catalysts For Commodities

In addition to the slumping dollar, some other familiar catalysts could be sparking commodities prices to the upside.

“Many news headlines point to rising or falling Chinese demand growth as a main influence of commodity performance,” said S&P Dow Jones Indices in a recent note. “However, there are many other fundamentals like the U.S. dollar and interest rates that drive commodities. Even in the Chinese market, there are forces besides demand growth like demand for storage and demand for metals to be used as financial collateral. So, in this analysis, the impact of Chinese demand growth changes on overall commodities, sectors and individual commodities is examined, using year-over-year data from 1970.” 

While DBC is heavily allocated to energy commodities, the worst-performing patch in the commodities complex, the ETF does feature solid exposure to industrial and precious metals as well as agriculture commodities.

China Looms Large

For DBC and rival diversified commodities ETF, China is key determinant in the price action of those funds.

“While a 1 percent rise in Chinese GDP growth helps every sector, a 1 percent drop in Chinese GDP growth only reduces positive returns overall and for metals and energy,” said S&P. “For precious metals, although the direction of returns and Chinese GDP growth changes moves together more frequently up than down, the average returns for a 1 percent Chinese GDP growth move in either direction is about the same.”

Still, investors will need some convincing about returning to commodities ETFs. Over the past 90 days, DBC has seen outflows of $113.3 million.

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