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 ETFs 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 (GS). 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 trend (read: 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, respectively.
With improving global sentiments, Goldman analysts believe 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 period.
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 (GSC), which tracks the same index that is expected to produce 3% returns.
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 Zacks ETF Center):
iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP)
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% share, respectively.
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 year.
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 (GSG)
Another way to play the broad commodity markets is with GSG, which measures the performance of the S&P GSCI Total Return Index.
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 hard.
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 (DBB)
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 trading.
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 2013.
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