Commodity Etfs DIRECT

Other than choosing actively managed mutual funds most DIY investors would want to establish their own positions utilizing the new ETF tools that are available. The next few sections outline these areas.

The first ETF to invest in a commodity directly was Streettracks Gold ETF [GLD]. This launch in late 2004 was followed quickly by competing iShares Gold ETF [IAU], which has been less well received than [GLD]. The latter is the result of the typical "me too'' ETF investor behavior where investors go with the first offering ignoring the subsequent offerings that are less liquid and not unique enough to capture their interest.

[GLD] has been a stunning success. Many attribute the rise in gold prices from 2004 to 2007 to the demand for the metal resulting from these funds. Previous to the [GLD] launch gold investing for investors was confined to futures and options trading [the leverage and continuous contract rollover was off-putting to most individual investors], precious metals stocks [which also could be dissatisfying due to the unreliability of various company prospects], and numismatic coin collections [marked by heavy sales expenses and little liquidity]. A liquid ETF tracking the price movement of gold overcame previous gold investing deficiencies. It shouldn't be too surprising that subsequently the more speculative and volatile silver issue, [SLV] iShares Silver ETF was launched in April 2006.

In lieu of using a managed futures product such as the Rydex Managed Futures fund, there now exists commodity ETFs where investors can structure their own allocations and do so using whatever strategy suits them best. Leading the way in this regard has been Deutsche Bank [DB], which has created a wide variety of commodity indexes upon which ETFs have been based.

Again, as described previously, the reason to add this type of product to conventional portfolios is to reduce risk and increase overall performance by adding uncorrelated assets to a conventional portfolio of stocks and bonds.

To assist with marketing of their products, PowerShares and DB have joined forces, with the former using their marketing clout and asset management remaining within the domain of DB. This has been a convenient relationship for both since DB had the expertise in the area but not the marketing network and PowerShares needed the products.

DB's products fall into several areas. First, there is the broad-based commodity index [DBLCIX], which contains six specific commodity sectors: crude oil [35%], heating oil [20%], gold [10%], aluminum [12.50%], wheat [11.50%], and corn [11.50%]. The index is what ETF, DBC is linked to. Investors seeking to add commodities can utilize this ETF in whatever weighting they choose. Alternatively there is the more widely known index-linked ETFs based on the popular Goldman Sach's Commodity Index [GSCI] launched by Barclays GSG [iShares GSCI]. However, GSCI as of this date is weighted 71 percent to energy, which may be too heavily weighted toward that sector for some. The DJ AIG Commodity Index has an ETF trading in London currently which no doubt will be brought to the United States eventually. Its weightings are even more unique with only 33 percent to energy, 18 percent to grains, 18 percent to industrial metals, and only 8 percent to precious metals.

Our own opinion is that DBC is based on DB's historical back-tested research superior to other broad commodity indexes despite using fewer market sectors. Other ETFs contain many more subsets but the overall weightings of DBC seem to accomplish better returns using fewer sectors. The index history in Table 4.2, compares DB Commodity Index to GSCI and the DJ-AIG Commodity Index.

DB also features more targeted commodity issues including:

■ DB Base Metals ETF [DBB], which is evenly divided among aluminum, zinc, and copper.

■ DB Agricultural ETF [DBA], which is divided evenly among corn, wheat, soybeans, and sugar.

■ DB Energy ETF [DBE], which is divided unevenly by Light Sweet crude oil, Brent crude oil, heating oil, RBOB gasoline, and a small 10 percent weighting to volatile natural gas.

TABLE 4.2 Fund Performance and Index History (%)*


l Year

3 Year

5 Year

lO Year


DB Commodity Index


















*As of December 31, 2006.

Source: PowerShares Capital Management LLC & DB Commodity Services.

*As of December 31, 2006.

Source: PowerShares Capital Management LLC & DB Commodity Services.

■ DB Gold ETF [DGL], which tracks gold and has as its primary advantage a much lower price than GLD, for example.

■ DB Silver ETF [DBS] tracks silver prices but does so in a much lower price manner. Some retail investors find SLV's $130 price difficult for them to acquire round lots whereby DBS is currently at $25 making it more appealing. However, the price doesn't alter the percentage moves.

■ DB Precious Metals ETF [DBP] tracks a relationship of 80 percent gold to 20 percent silver.

■ DB Oil ETF [DBO] tracks light sweet crude oil and does so at a lower share price, which may also have more retail appeal.

In the popular energy markets, crude oil also has several ETFs beyond the DBO issue from which to choose. U.S. Oil Fund LP [USO] was launched first. Oddly to some observers it tracked the movement of West Texas Intermediate Crude oil market in lieu of the more conventional Light Sweet Crude oil market that we're most familiar with. That was an initial turn-off since WTIC pricing is much under the radar. But interestingly instead of tracking the price of oil in dollars, USO tracks the percentage movement of the spot price. It seems an effective method and based on trading volumes, nearly 5 million shares per day, USO is the most popular oil ETF available.

There have been some unintended consequences from some oil ETFs. Claymore Securities launched a bullish [UCR] and bearish oil ETF [DCR] allowing investors to either make a directional bet that oil prices would rise or fall. Unfortunately for Claymore something nasty happened after the launch on January 16, 2007. That day crude oil prices dropped 3 percent but DCR was up 2 percent while UCR was also down 2 percent. Huh? Well, that was a bite in the shorts literally, eh? Claymore was quite embarrassed by it and correctly blamed specialists for poor market making. Nevertheless their series of oil ETFs got a black eye and now investors must stand aside and see how these issues perform over the next year or so before one can confidently use them again. Unfortunately with confidence low so, too, is volume and that will hurt in the long run as investors shun both series.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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