Beyond DBC: Three Promising Commodity ETF Options

by on August 2, 2010

The incredible growth in ETF assets in recent years has come not from the equity corner of the investable asset universe, but from an asset class that generally receives a very minor allocation in long-term portfolios (if any at all). Cash inflows into commodity ETFs in the first half of the year topped $18 billion, accounting for about half of all inflows to exchange-traded products.

The explanation for this surge in interest appears to be twofold. Until ETFs burst on to the investing scene, commodities were an asset class utilized primarily by the largest and most sophisticated investors. Because commodity exposure requires either physical storage or ongoing maintenance of a futures-based strategy, there are some logistical (and cost) hurdles involved. But now ETFs offer exposure to everything from corn to sugar to lead, democratizing an entire asset class by bringing it withing reach through a single security.

Moreover, the performance of equity markets over the last few years has heightened investors’ awareness of the benefit of adding non-correlated assets to a traditional stock-and-bond portfolio (although correlations between stocks and commodities have surged since the recent recession began). Commodities can add value to a portfolio as a diversifying agent, potentially smoothing out volatility for investors [see also “Optimum Yield” ETFs: A Contango-Free Alternative?].

By far the most popular option for broad-based commodity exposure through ETFs is the PowerShares DB Commodity Index Trac (DBC), which has assets of about $4.5 billion. The fund’s holdings include futures on 14 of the most heavily-traded and important physical commodities in the world. But there are a number of interesting options beyond DBC; below we highlight three interesting options from the Commodities ETFdb Category which you may not have considered but provide similar access to the commodity markets [for more ETF insights, sign up for our free ETF newsletter]:

GreenHaven Continuous Commodity Index Fund (GCC)

GCC tracks the Continuous Commodity Index-Total Return, an equal weighted index comprised of 17 commodities plus an additional Treasury Bill yield. The key difference in GCC is the equal weighting, with a daily rebalance to ensure that each of the 17 securities accounts for the same portion of total assets. That means that GCC won’t be dominated by energy holdings as are some broad-based commodity funds; instead offering a higher weighting towards platinum, sugar, corn, and gold which allows it to differentiate itself from the popular DBC [see GCC's holdings here].

iShares GSCI Commodity-Indexed Trust Fund (GSG)

This ETF measures the S&P GSCI Total Return Index, which is designed to provide exposure to a broad-based basket of commodities. The fund is made up of one holding that contains broad commodity futures and Treasury Bills. GSG is heavy in exposure to oil and gas; energy commodities make up almost 70% of exposure, followed by agricultural commodities (14%) and industrial metals (8%). GSG has only a minor allocation to precious metals; gold and silver account for less than 5% of total exposure [see GSG's fundamentals here].

E-TRACS UBS Bloomberg CMCI ETN (UCI)

UCI tracks the UBS Bloomberg Constant Maturity Commodity Index Total Return, the first commodity benchmark to diversify across both commodities and maturities. The fund invests in a group of 26 futures based in the energy, precious metals, industrial metals, agricultural and livestock sectors. The maturities of the underlying futures contracts range from three months to three years [see UCI's performance charts here].

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Disclosure: No positions at time of writing.