ETF Expert

Did you think that the natural gas story was the only problem facing commodity ETFs? Hardly! The Commodity Futures Trading Commission (CTFC) recently announced that it will terminate its prior leniency with regard to exceeding federal limits on speculative agricultural positions. Limitations will be installed 10/31/09.

If the CTFC is concerned about a crisis in food prices, you better believe that other commodities will make it to the limitation chop-block. Most likely to garner restrictions? Crude oil.

For now, though, the new rules affect the PowerShares DB Agriculture Fund (DBA). DB Ag allocates 25% to 4 key commodities — soy, sugar, corn and wheat. With $2.3 billion in assets, it is certain to be impacted by the CFTC’s trading overhaul.

Similarly, there’s $3 billion in the PowerShares DB Total Commodity Index Tracking Fund (DBC). Revised rulings here will restrict what the CTFC views as excessive concentration in wheat and corn, as DBC currently has 11.25% in each.

So what other ETF alternatives might an investor in the “total commodity concept” have? These 3 come to mind:

1. The iShares S&P GSCI Commodity Index Fund (GSG) holds an “investing pool” that tracks the GSCI Total Return Index — an index that purports to reflect the performance of a diverse basket of common commodities.

Its sizable enough at $1.5 billion in assets. It averages more than 500,000 shares trading on rolling 3-month basis. And it’s reasonably priced for a total commodity fund at an expense ratio of 0.75%.

However, while the fund tracks 24 commodities, it does so in manner that the GSCI believes is critical to the world economy. Ergo, 75% is in energy with 45% in crude oil. 10% goes to precious metals, 10% goes to agriculture, 3.5% goes to livestock and 3.5% to precious metals. In this fund, silver and gold enthusiasts are not happy campers.

2. The GreenHaven Continuous Commodity Index Fund (GCC) comes closer to a total commodity concept than any of its peers. Tracking the “Continuous Commodity Index – Total Return,” 17 commodities receive an equal weighting in the portfolio. In this manner, it is believed that energy and industrial metals aren’t more influential than precious metals, grains and livestock.

GCC seems to have the “right stuff,” except in the department of cost. There’s a current management fee of 0.85%, as well as a looming brokerage fee of 0.24%. More importantly, there’s the hidden cost of a wider bid/ask spread due to significantly less volume of trading activity.

For example, if one loses .25% on a purchase, the round-trip cost of ownership may be as high as an additional .50%. However, if some folks aren’t pleased with the modifications that PowerShares will have to make to its flagship DBC vehicle, GCC may gain more assets.

3. Dow Jones Commodity Index Total Return ETN (DJP). This one was my preferred vehicle for years. I wrote several features in favor of this “note,” until the credit crisis called into question the viability of exchange-traded notes altogether.

The problem here is simple. While it is a better diversifer than many other commodity indexes because it does not overweight energy, DJP is an agreement with Barclay’s bank. They’ll pay you the exact return of the Dow Jones-AIG Commodity Index Total Return Index, minus the published fees and expenses. 

Still, there’s no getting around the credit risk. And while I don’t feel that Barclay’s will ever find themselves unable to fulfill iPath obligations, they did sell off their golden goose in the market-share leading iShares ETFs.  

Total Commodity ETFs 1 Year

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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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