A lot of exchange-traded products try to beat the market, but
it's only in commodities that the more active products are often
more popular than their plain-vanilla counterparts.
The most popular basket commodities fund, the PowerShares DB
Commodity Index Tracking Fund (NYSEArca:DBC), has over $7 billion
in assets under management-more than three times the assets of the
iPath Dow Jones-UBS Commodity Total Return ETN (NYSEArca:DJP) and
nearly six times the assets of the iShares S&P GSCI
Commodity-Indexed Trust (NYSEArca:GSG).
DBC's differentiating factor is mainly that it dynamically picks
the futures contracts it holds in an attempt to mitigate contango,
which occurs when futures contracts are priced higher than spot
with each successive month on the futures curve. This erodes
returns, because maintaining exposure means paying more for a new
contract than the price fetched for the contract that's about to
In contrast, plain-vanilla products like DJP and GSG simply hold
the nearest-to-expire contract on each of their commodities. Every
month, as those contracts near expiration, fund managers sell them
and buy the new nearest-to-expire contracts.
The idea behind funds like DBC is that they can outperform even
an index holding the exact same commodities by being smarter about
choosing the right futures contract that will deliver the least
Like all funds that have an element of active management,
however, they come with active risk; in this case, the risk that
the fund manager will pick the wrong contract.
The chart below shows DBC's performance in 2012 against the
performance of a front-month "index" I constructed based on
single-commodity front-month futures indexes weighted with DBC's
that track dynamic versions of the GSCI also don't differ that much
from the GSCI-GSC underperformed the GSCI by about 1.6 percentage
points and the iPath Pure Beta S&P GSCI-Weighted ETN
(NYSEArca:SBV) underperformed it by about 1.7 percentage points.
They're not earning their expense ratios, but they're also not
losing much more money than their expense ratios would suggest.
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