ETF Talk: Metals are Not a Great Foundation for Your Portfolio

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Modern life is dependent on industrial metals. If you are interested in making an investment that gives you exposure to public companies that provide base metals for a host of uses, consider the PowerShares DB Base Metals Fund (DBB).

DBB is an exchange-traded fund (ETF) that offers a way to tap into the prospects of several key metals. For example, aluminum is important for everything from transport to beverage containers, since it is light, rust-resistant and highly conductive. Zinc is added to iron and steel as a galvanizing agent, thereby making those metals rust-resistant. Zinc also is an additive in a wide range of products, from paint to plastics. Copper is vitally important to the electronics industry, appearing in circuit boards and power lines. That shiny metal also has uses in building, machinery and consumer products, among others.

DBB attempts to replicate, before fees and expenses, the performance of a rules-based index composed of futures contracts in aluminum, zinc and copper. However, this is a highly volatile and non-diversified fund, so it carries additional risk compared to many investment alternatives.


So far in 2014, DBB is down 1.66%. The previous year saw the fund fall 12.5%, even though the S&P 500 rose 29.6%. As you’ll see from the chart below, this commodities fund is highly volatile, with a general downward trend for the year punctuated by frequent temporary gains.

The fund holds roughly equal London Metal Exchange futures contracts for each of the metals in which it invests: aluminum, copper (grade A) and zinc. The exact weightings fluctuate daily based on the underlying futures prices. The fund also includes interest income from its holdings of U.S. Treasury securities.

Industrial metals are the base of the modern age. Electronics, modern construction and modern transportation all are dependent on these metals for safety and reliability. As an investor, however, base metals would represent a volatile and risky part of your portfolio. PowerShares DB Base Metals Fund reflects the sector’s volatility.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider 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 on Eagle Daily Investor about commodities fund GSG, soybean fund SOYB and nuclear energy fund URA. I also invite you to comment about my column in the space provided below my Eagle Daily Investor commentary.

Best,
Doug Fabian

Doug Fabian has continued to uphold the reputation of the Successful Investing newsletter as the #1 risk-adjusted market timer as ranked by Hulbert’s Investment Digest.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs , Commodities , Investing Ideas

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