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Diversifying with a Broad Commodity ETF


Commodities have been falling behind over the past year, but investors who believe the winds are shifting can take a look at an actively managed commodity exchange traded fund option.

On the upcoming webcast, The Evolved Commodity ETF Landscape and Diversification Benefits, Kevin Baum, vice president and senior portfolio manager at Invesco PowerShares, and Lorraine Wang, head of global ETF products & research at Invesco PowerShares, argue that there is value in commodity assets and point to an ETF option to re-position for 2015.

Specifically, commodities offer diversification qualities and allow investors to access global economic growth.

“Because most commodities have a similar value across the globe, they tend to trade independently of any country’s domestic economy, and their prices are largely determed by global supply and demand forces,” according to a research note, titled PowerShares DB Commodity & Currency ETFs.

Moreover, commodities help hedge against inflation. While inflation remains muted now, inflationary pressures could rise as the U.S. economy continues to expand.

“Inflation is the increase in the amount of currency required to purchase goods and services,” according to the note. “Commodities can help protect investment portfolios against inflation because they represent the value of the goods, not the value of the currency.”

Investors interested in gaining exposure to commodities assets can take a look at the actively managed PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (PDBC) . PDBC is comprised of futures contracts on 14 heavily traded commodities, including aluminum, Brent crude, copper, corn, gold, heating oil, light crude, natural gas, RBOB gasoline, silver, soybean, sugar, wheat and zinc. [PowerShares Kicks the K-1 With New Commodity ETF]

Commodity ETFs and other funds that invest in futures contracts are susceptible to contango in the futures market – contango occurs when the price on a futures contract is higher than the expected future spot price. Since ETFs that hold futures contracts sell the contracts before they mature and purchase a later-dated contract, the ETF loses money each time it rolls contracts to a costlier later-dated contract in a contangoed market.

However, PDBC tries to negate the negative effects of contango by selecting futures contracts with the highest implied roll yield.

Financial advisors who are interested in learning more about the commodities market can register for the Thursday, December 11 webcast here.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.