U.S. Markets closed

Commodities ETFs Diverge from Stocks as Wall Street Sees Bull Market End


PowerShares DB Commodity Index Tracking Fund (DBC) is down about 6% so far in 2013 compared with a gain of roughly 14% for the S&P 500 to continue the resources ETF’s underperformance trend that started about two years ago.

Now, Wall Street analysts say commodities’ best days are probably behind them.

“Commodities are trailing equities for the longest stretch in almost 15 years as Goldman Sachs Group Inc. and Citigroup Inc. predict the end of the decade-long bull market even as the global economy expands,” according to a Bloomberg report Thursday.

With assets of nearly $6.5 billion, DBC is the largest diversified exchange traded product for commodities. It tracks energy, base metals, precious metals and agriculture by investing in futures contracts. The ETF charges a management fee of 0.85%.

“Broad-basket commodity products will likely interest two kinds of investors: those who believe global demand for commodities will grow in coming years, and those seeking diversification and an inflation hedge. Investors interested in growing worldwide demand for commodities should keep an eye on demand from China, India, and the rest of the emerging markets,” writes Abby Woodham, Morningstar analyst, in a report on DBC.

“As an inflation hedge, commodities usually underperform in periods of low inflation and outperform when inflation is high, allowing investors to maintain their purchasing power,” she added. “Generally, commodities shine at the beginning of a recession and at the end of an economic expansion. As for risk, commodities are a high-volatility asset class.”

Other products in the category include iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP), iShares S&P GSCI Commodity-Indexed Trust (GSG), ELEMENTS Rogers International Commodity Index ETN (RJI), U.S. Commodity Index (USCI) and Continuous Commodity Index Fund (GCC). [Equal-Weighted Commodity ETF]

In 2013 the commodity ETFs have been hit by a rising U.S. dollar and a pullback in gold and some other resources.

Investors pulled a record $23.3 billion from commodity funds this year as global equities attracted $182 billion, Bloomberg reports.

“Anytime you have a whole lot of inventory and visible supply, prices are going to be under pressure,” said John Stephenson, portfolio manager at First Asset Investment Management, in the article. “The real issue for commodities is the source of demand, China, is weak.”

PowerShares DB Commodity Index Tracking Fund

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.