Commodities are once again on the rise this month as fear over
Chinese growth is waning and the U.S. is now exhibiting a pretty
robust recovery. As a result, most commodity
and ETNs tracking the broad market have added some solid returns
in the first half of March trading.
This trend is expected to continue,
according to a recent report
from Goldman Sachs (
). The analysts at Goldman Sachs believe that the broad commodity
markets - as represented by the S&P GSCI Enhanced Commodity
Index - will advance 3% over the next 12 months.
The index is down about 0.5% so far in the year, so clearly
the investment giant is expecting some solid performances out of
a few key sectors going forward in order to reverse this
Commodity ETFs Plunge On Supply Forecast
In fact, industrial metals are forecast by the firm to lead
the commodity market with a 7% gain, closely followed by
livestock and energy with 5% and 3% moves higher,
With improving global sentiments,
that the sell-off in commodity prices is likely overdone and the
price risks are shifting more to the upside.
This is evidenced by the fact that strong demand from China
and continued growth in construction completions, property sales
and power infrastructure-related demand would lead to rise in
copper prices to $9,000 metric tons in the next six month
Further, while limited oil supply would support near term
Brent oil prices around current levels, the long term price will
hover around $90 per barrel (read:
Brent Oil ETF (BNO): Time to Sell?
For investors interested in gaining exposure to these
commodities, there are a wide variety of options, including ETFs
and ETNs. An easy choice would be to play Goldman's commodity
forecast with their own fund -
Goldman Sachs Connect S&P GSCI Enhanced Commodity ETN
, which tracks the same index that is expected to produce 3%
Beyond GSC, we have highlighted three ETFs which we think
could be well positioned if Goldman Sachs' commodity prediction
comes true at some point this year (see more ETFs in the
iPath Dow Jones-UBS Commodity Index Total Return ETN
Investors looking to play the Goldman commodity forecast could
find DJP to be a solid pick. Launched in June 2006, the note
provides exposure to the broad commodity markets and tracks the
Dow Jones-UBS Commodity Index Total Return.
The index delivers returns through an unleveraged investment
in the futures contracts on 19 physical commodities comprising
the index plus the rate of interest on specified T-Bills.
The note has a slight tilt towards energy and agriculture that
makes up for around 31% of assets each. Industrial metals,
precious metals, and livestock account for 19%, 13%, and 6%
The product has done a great job in garnering investor
interest with an impressive AUM of $1.9 billion and daily volume
of about 300,000 shares. This suggests no additional cost in
terms of bid-ask spreads beyond the expense ratio of 75 bps a
Though the note lost about 1.5% year-to-date (as of March 12),
it added 0.89% over the past week, suggesting a modest turnaround
may be at hand in this product.
iShares S&P GSCI Commodity-Indexed Trust (
Another way to play the broad commodity markets is with GSG,
which measures the performance of the S&P GSCI Total Return
In total, the product holds 24 different commodities in its
basket with heavy weights going to the energy (70%) space,
followed by agriculture (15%), industrial metals (7%), livestock
(5%) and precious metals (3%).
In terms of individual commodities, three energy products -
WTI crude (35%), Brent oil (13%), and natural gas (7%) take the
lion's share (read:
Time to Buy Energy ETFs?
The fund charges a relatively higher 75 bps in annual fees
while tight bid/ask spread minimizes the additional cost for the
fund. It trades in good volumes of more than 230,000 shares per
day, so getting into and out of the product shouldn't be too
The product has managed assets of $1.1 billion so far,
although it has seen some weakness, losing 0.6% year-to-date,
though it has added 0.25% in the last week.
If Goldman's predictions come true, then the fund could
exhibit a good return thanks to its weightings mix.
PowerShares DB Base Metals Fund (
Investors playing on Goldman's prediction could also focus
purely on the industrial metal sector, as Goldman expects
industrial metals to outperform in the future. This can easily be
done by focusing on PowerShares' popular DBB, a top choice in
this market segment.
The product tracks the DBIQ Optimum Yield Industrial Metals
Index Excess Return, which is a rules-based index consisting of
futures contracts on some of the most heavily traded base metals
commodities in the world.
Launched in January 2007, the product holds three commodities
with a big chunk tied to copper, as this commodity accounts for
36% of the assets (read:
Copper Mining ETFs Head-to-Head
). Aluminum and zinc make up for 33% and 31% share, respectively,
rounding out the rest of the portfolio.
It should also be noted that the fund is liquid, as it trades
in volumes of more than 286,000 shares per day on average. As a
result, investors probably will not does not have to pay any
extra cost beyond the expense ratio of 0.78%.
However, the fund has been quite weak as of late, largely
thanks to copper's slump. It is now down about 5% in the YTD time
frame, though it has managed to move higher in recent
Still, we are a little less bullish on industrial metals this
year, assigning this ETF a 4 or 'Sell', with our Zacks ETF
Ranking system. So, we are looking for a bit more good news out
of this space, although for those seeking to follow Goldman's
predictions, this could be a solid pick going deeper into
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PWRSH-DB B METL (DBB): ETF Research Reports
IPATH-DG AIG CM (DJP): ETF Research Reports
GS-CONN SP E CM (GSC): ETF Research Reports
ISHARS-SP G-CMD (GSG): ETF Research Reports
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