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Best Commodity ETFs of Q3

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Commodities’ weak performance continued in the third quarter, marking the longest losing streak in more than three years. The Bloomberg Commodity Index, which measures returns on 22 raw materials, declined 2.5%. This was largely due to a strong dollar, trade frictions and concerns over the Chinese demand outlook. Additionally, weakening economic growth in many parts of the world dampened the appeal for commodities.

Notably, a high dollar made dollar-denominated assets expensive for foreign investors, potentially diminishing demand for commodities. Per data compiled by Bloomberg Intelligence, investors pulled $2.57 billion from long-only ETFs linked to broad baskets of raw materials in the third quarter, including about $140 million in September. Total assets across all commodity ETFs have slid $23 billion since April.

Metals and soft commodities were the major losers. In particular, gold, often viewed as a safe haven, registered the longest monthly losing streak in September since January 1997, dragged down by rising U.S. interest rates. Also, copper slid into bear markets, recording three straight quarters of losses — the longest since 2015 (read: Gold in Longest 4-Year Losing Streak: Go Short with ETFs).

The soft commodities sector dropped 11.51% in the third quarter, making it the worst-performing sector. Notably, sugar price slipped to the lowest level in a decade and price of coffee was also at the lowest since 2005. Other double-digit losers include lead, nickel, zinc, rice, ethanol, cocoa, cotton and lumber.

However, energy and palladium were the bright spots. Brent jumped to its highest level in nearly four years on the potential U.S. sanctions against Iran expected to kick-off in November. With the rising oil prices, gas prices at the pump also rose to the highest in four years. On the other hand, pallidum prices were on the rise buoyed by solid demand for automotive industry, mainly catalytic converters for vehicles. A jump in new-car registrations in the European Union during July and August drove palladium prices, per analysts.\ Additionally, China’s focus on building domestic demand as well as higher demand added to the strength (read: 4 Reasons Why Palladium ETF is Shining).

Outperforming ETFs From These Zones

Given this, we have highlighted the best-performing ETFs focused on these commodities and are expected to continue their strong movement in the fourth quarter as well based on current trends.

Invesco DB Oil Fund (DBO - Free Report)

This product provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of 1.3 million shares and has AUM of $415.6 million. It has an expense ratio of 78 basis points (bps) and gained 14.1% in the third quarter (read: Oil ETFs: What You Need to Know).

ETFS Physical Palladium Shares (PALL - Free Report)

PALL seeks to match the price of palladium. With AUM of $140.8 million, the ETF owns palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Chase Bank. It has an expense ratio of 0.60% and sees lower volume of about 25,000 shares a day. The product was up 11.6% last quarter and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Top and Flop ETFs of September).

United States Gasoline ETF (UGA - Free Report)

This ETF provides investors with exposure to front-month gasoline futures, tracking RBOB gasoline for delivery to the New York harbor, which is traded on NYMEX. The ETF is illiquid with daily trading volume of about 17,000, suggesting that investors have to pay extra beyond the annual fee of 75 bps per year. The fund has managed assets of $49.7 million so far and gained 6.8% in the last quarter (read: 4 ETFs Set to Soar in the Aftermath of Hurricane Florence).

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