Exchange Traded Funds (ETFs)

Easy Exposure to the Commodities Market

The PowerShares DB Commodity Index Tracking Fund (DBC) is the first exchange-traded fund (ETF) that we will cover in a series of commodity-themed funds.

A commodity is defined as a raw material or agricultural product that can be traded. In financial terms, a commonly includes energy products such as oil and natural gas, metals such as gold and silver, agricultural products such as wheat and all types of meat and livestock.

The most popular way to invest in commodities is through a futures contract, which is an agreement to buy or sell, in the future, a specific quantity of a commodity at a specific price, according to Investopedia. Direct investment in commodities is possible in most brokerage accounts.

However, the commodities futures market can be very volatile, with big price swings not an uncommon occurrence, making it challenging for even experienced traders to do well. This is where ETFs come in. They offer investors a convenient way to gain exposure to the commodities market and reduced volatility (thanks to diversification) in one package. Some investors hedge against inflation with commodity funds. DBC caps its portfolio exposure to energy at 60% and invests around 20% each in agricultural products and metals.

By far the largest of the commodities ETFs, DBC tracks an index of 14 of the most heavily traded and important physical commodities in the world. It currently has roughly 70% of its $2.60 billion in assets invested in commodities in North America and the United Kingdom. DBC also has a relatively low expense ratio of 0.85% and strong liquidity with a daily trading volume of $3.2 million.

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The chart below shows that DBC has been on a downward trend for the first half of 2017, but then moved higher starting in July. Year to date, DBC has returned 2.95%. The volatile nature of commodities can be seen in the past performance of the fund: -27.6% in 2015, 18.6% in 2016 and 4.86% in 2017.

DBC’s top holdings are WTI Crude Futures (March 19), 6.80%; Brent Crude Futures (Jan. 19), 6.39%; Ny Harbor ULSD Futures (June 18), 6.30%; Gasoline RBOB Futures (Jan. 19), 5.97%; and PowerShares Treasury Collateral ETF, 4.84%.

For investors who are seeking a convenient way to make a play on the overall commodities market, I encourage you to look into PowerShares DB Commodity Index Tracking Fund (DBC). Please note that the nature of commodities means that DBC carries with it a higher degree of risk than many other funds on the market.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.