A Broad, Big-Picture Investment in Commodities

Commodities are products that investors seem to view as interchangeable widgets. While a baker may have opinions about the source of his grain or a rocket engineer may carefully choose a specific aluminum for her satellite housing, investors tend to see commodities as equivalent inputs for products. A way to invest in this big-picture view of commodities in general is through PowerShares DB Commodity Index Tracking Fund (DBC).

PowerShares DB Commodity Index Tracking seeks to track changes, positive or negative, in an index tracking futures contracts in 14 physical commodities in the agriculture, energy, industrial metals and precious metals sectors. The exchange-traded fund (ETF) invests in a variety of sector-specific ETFs to replicate the index’s results.

DBC has lost 2.69% since the turn of the year, continuing a general downward trend from 2013. This retreat is to be expected, as commodities as a whole did much more poorly than the stock market last year.

The fund rebalances its holdings each December. The intent is to match the designated base weights for the holdings of its future contracts. The base weight percentages are: Brent crude, heating oil, light crude and RBOB gasoline, at 12.38% each; gold, 8.00%; corn, soybeans, sugar #11 and wheat, at 5.63% each; natural gas, 5.50%; aluminum, grade A copper and zinc, at 4.17% each; and silver, 2.00%.

Keep in mind that commodities are highly volatile, so the results of this fund likewise are volatile. An additional factor to consider when deciding if this fund makes sense in your portfolio is that it is taxed as a limited partnership, since it buys futures contracts. As a result, you will receive a “summary K-1” tax form. The Internal Revenue Service (IRS) requires funds such as DBC to be “marked to market” for the value of its year-end assets, and each investor is apportioned a pro rata share of any capital gains or losses to report on their income tax returns. However, if your DBC shares are held in a tax-exempt account, the income from this fund generally will not need to be reported on your federal tax return. The fund offers further information on the web about how DBC is taxed, if you are interested in reading further. If you expect commodities to recover, you may want to consider PowerShares DB Commodity Index Tracking Fund (DBC) in the future.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please give strong consideration to subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You may see your question answered in a future ETF Talk.

In case you missed them, read my commodities-focused e-letters from previous weeks about commodities fund GSG, metals fund DBB, soybean fund SOYB and nuclear energy fund URA. I also invite you to comment about my column in the space provided below.