Trade tensions, especially between the world’s two largest economies, have been taking a toll not only on the equity world but also on the commodity space. In fact, the escalating tit-for-tat tariff threats pushed the Bloomberg Commodity Index, which measures the returns on 25 raw materials down by 8.9% from the latest peak in late May.
Notably, the index dropped as much as 2.80% on Jul 11, the most since 2014 after the United States threatened to impose 10% tariffs on further $200 billion in products imported from China, leading to further escalation in the U.S.-China trade conflict. China's commerce ministry called the U.S. actions "completely unacceptable" and warned of retaliatory moves (read: Trump Slaps Further Tariffs: Profit from Inverse ETFs).
The latest round of tariff threats came following warnings by Trump to impose additional tariffs on $500 billion in Chinese goods, should Beijing retaliate against U.S. tariffs that were implemented on Jul 5. Trump imposed 25% import duties on $34 billion in Chinese goods and China hit back with the same scale and strength. Each side is also planning tariffs on further $16 billion in goods, which will take the total worth of goods to $50 billion.
If the situation worsens and turns out to be a full-blown trade war, it would affect the real economy and put the brakes on global economic growth. In particular, Industrial metals like copper and zinc took the heaviest hit over worries that the dispute could dent China's commodity-hungry economy, while agricultural products are bearing the pain of new tariffs or higher duties on crops like soybeans and corn.
Investors should note that China is the top consumer of raw materials and any slowdown in its economy would definitely hurt commodities. Further, increasing trade frictions has resulted in a strengthening dollar, which has in turn made dollar-denominated assets expensive for foreign investors, potentially diminishing demand for the commodities (see: all the Industrial Metals ETFs here).
That said, we have highlighted four commodity ETFs that have been worst hit over the past one-month since trade war tensions escalated.
United States Copper Index Fund (CPER - Free Report)
This fund seeks to track the performance of the SummerHaven Copper Index Total Return, plus interest income from CPER’s holdings. The index provides investors with exposure to front-month copper futures contract traded on the on the NYSE Arca. The product has accumulated $9.9 million in its asset base, while sees paltry volume of about 8,000 shares a day. It charges 80 bps in annual fees and has lost 16.2% in a month. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Copper ETFs Surge on Supply Disruption Threat).
Invesco DB Base Metals Fund (DBB - Free Report)
This product seeks to track 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. Currently, aluminum futures contracts account for 35.8%, followed by copper (33.6%) and zinc (30.6%). The ETF has amassed $289.9 million in its asset base and trades in average daily volume of about 218,000 shares. It charges 82 bps in annual fees and has plummeted about 14.8% in a month. The fund has a Zacks ETF Rank #3 with a High risk outlook.
United States Agriculture Index Fund
This fund follows the SummerHaven Dynamic Agriculture Index Total Return, plus interest income from USAG’s holdings. The index comprises 14 Eligible Agriculture Futures Contracts that are selected on a monthly basis consisting soybeans, corn, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs. USAG is unpopular and liquid option with AUM of just $1.6 million and average daily volume of under 1,000 shares. It charges 80 bps in fees per year and has lost double digits in a month. The product has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
Teucrium Soybean Fund (SOYB - Free Report)
Unlike many commodity ETFs, this product doesn’t just cycle into the next month as expiration approaches. Rather it utilizes a much more in-depth approach that reduces the effects of backwardation and contango. The product uses three futures contracts for soybeans, all of which are traded on the CBOT Futures Exchange. The three contracts include the second-to-expire contract weighted 35%, the third-to-expire contract weighted 30% and 35% weighted contract expiring in the December following the expiration month of the third-to-expire contract.
The fund has amassed $21.4 million in its asset base and trades in a lower volume of about 42,000 shares a day. The product is the high-cost choice in the agricultural space as it charges a fee of 1.74% per year. The ETF is down 10.1% in a month and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (read: Soybean ETF in Focus as Prices Plunge to 9-Year Low).
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