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Follow Goldman to Invest in Commodity ETFs for 2018

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Broad commodities have staged a nice comeback in the second half of this year on tight supply conditions and strong global demand. A pick up in global growth with every major economy witnessing growth in almost a decade led to bullishness in the space.

Given the encouraging fundamentals, a New York-based research firm, Goldman Sachs (GS - Free Report) believes commodities should outperform equities and other asset classes next year. It expects commodities to rise almost 10% in 2018, against its previous forecast of 4% returns. Additionally, the tightening monetary policy in the United States will support the rally as commodities perform well during periods of rising interest rates (read: ETFs to Gain/Lose if Fed Turns Hawkish for 2018).

According to Jeffrey Currie, head of commodities research for the firm in New York, energy is expected to top with returns of 12% thanks to positive roll yield. The oil market remains in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for the whole of 2018. Industrial metals will likely generate flat returns and Goldman has a most bullish outlook on copper and most bearish views on aluminum. Though global demand remains robust for both the metals, copper will benefit from the end of a supply expansion boom while aluminum will see a decline in prices from growing supply.

Investors seeking to ride on Goldman’s views on commodities can choose from a wide variety of products, including ETFs and ETNs. Below, we have highlighted four ETFs which we think could be well positioned if Goldman commodity prediction comes true:

iShares S&P GSCI Commodity-Indexed Trust GSG

This fund follows the S&P GSCI Total Return Index offering exposure to a broad range of commodities through investments in futures contracts. Energy makes up for nearly 63% of the portfolio while agriculture and industrial metals round off the next two spots with double-digit exposure. GSG has AUM of $1.3 billion and average daily volume of 318,000 shares. It charges 75 bps in annual fees and has gained more than 11% over the past six months.
PowerShares DB Commodity Index Tracking Fund DBC

This fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on physical commodities, plus the rate of interest on specified T-Bills. In total, the index holds 14 futures contracts with a heavy weight going to energy (57%), followed by agriculture (21%), industrial metals (12%) and precious metals (9%). The fund charges 89 bps in annual fees while trades in a solid volume of 1.6 million shares per day. The product has managed assets of $2.2 billion and gained more than 11% in the last six months (read: Why These Commodity ETFs Are on a Tear).

PowerShares DB Energy Fund DBE

This fund seeks to track the DBIQ Optimum Yield Energy Index Excess Return plus the interest income from the fund's holdings of primarily US Treasury securities and money market income. It invests in futures contracts on some of the most heavily traded energy commodities in the world — light sweet crude oil (WTI), heating oil, Brent crude oil, RBOB gasoline and natural gas. The ETF has managed assets worth $172.4 million so far while trades in volume of 117,000 shares per day on average. It has 0.78% in expense ratio and has surged nearly 21% over the past six months (read: Energy ETF Hits New 52-Week High).

iPath Bloomberg Copper Subindex Total Return ETN JJC

The ETN tracks the Bloomberg Copper Subindex Total Return Index, which seeks to deliver returns through an unleveraged investment in the futures contracts on copper. The index currently consists of one futures contract on the commodity of copper (currently the Copper High Grade futures contract traded on the COMEX). The product charges investors 75 bps a year in fees, and has a lower level of AUM of $60.3 million. It trades in a paltry volume of about 49,000 shares a day on average. The ETN has increased nearly 16% in the past six months (read: Why Copper ETFs Are on a Tear).

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