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Most Surprising ETF Winner in This Slump? Commodities

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Equities across the board have been roughed up over the past week or so, as concerns have been building over some weak economic figures, and more importantly, talk of Fed tapering. This threat of a reduction in bond purchases has acted like a dark cloud over the market, causing many investors to cash in gains rather than wait out a storm.

Unsurprisingly, the talk has also impacted bond markets as well, as rates have slowly crept up in key categories. This has led to some losses in many bond funds, something that most investors haven’t seen in this asset class for quite some time (read Medium Term Treasury Bond ETF Investing 101).

Seemingly, no asset class has been safe from the sell-off and all have felt the pain. However, investors might be shocked to learn that one corner of the market, the commodity world, has seen a few big winners in the often beaten down base metal space,  as these have been completely going against the broad investing trend as of late.

What’s Behind the Strength?

A large reason for the robust trading in this corner of the investing world is some good data that we have seen on the industrial production and manufacturing fronts. The recent PMI Manufacturing Index squeaked by expectations for May while the Chicago PMI and many housing related figures also suggested strength, which is great news for the base metal space (also see 3 Commodity ETFs Still Going Higher).

However, the data hasn’t been great all around as the ISM Manufacturing Data slipped into contraction territory—just barely—while factory orders came below expectations. Still, when investors factor in a slightly weaker dollar, which has boosted commodities across the board, base metals have started to look a bit more promising lately, especially when compared to the other corners of the investing world.

ETF Impact

In terms of options for this corner of the market, there are a little over a dozen, though many are thinly traded and have modest bid ask spreads. On the high side of the popularity front, the PowerShares DB Base Metals Fund (DBB - Free Report) and the iPath Dow Jones UBS Copper ETN easily lead the way in terms of assets under management (also read Base Metal ETFs Soar on Strong Data).

Over the past five day period, DBB and JJC have handily crushed the broad stock market, and are outperforming bonds as well. In fact, DBB is up about 3.9% over the past five days, JJC has added a little over 2%, while BND and SPY are both posting losses (-2.4% for the stock index and -0.60% for the bond fund).

Meanwhile, more specialized industrial and base metals have done even better for investors, including a few 7%+ gains when looking at the past week performance numbers. While it is important to note that these can be somewhat illiquid, their gains in the face of broad weakness has been pretty astounding:


Base Metal ETN:

One Week Performance

Lead: (LD - Free Report)






Bottom Line

While events have certainly been gloomy the last few days in the market, it is important to remember that there is always a bright spot out there. This time, the strength has come to us from an unlikely place; the often disregarded base metal ETF market.

This corner of the investing world has managed to fight past a downward trend that has taken hold of the two major asset classes—stocks and bonds—and beat out others in its category as well. Certainly, decent data and a weakened greenback have made their road a little easier, but their near term performance has been pretty shocking to many investors nonetheless (read Is USCI the Best Commodity ETF?).

So, although commodities have been pretty weak this year, at least a few have been able to provide some uncorrelated gains, at least in the short term. While this trend may not continue, it is good to see some decent news finally coming out of commodities, suggesting that the space may have bottomed out at least in the near term, and that it may start to make some investors think twice about the space heading into the summer months.

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