Commodities ETF: They're Not Interesting, But Key To Everyday Living

Back in February 2006, Deutsche Bank introduced the first commodities exchange traded fund (ETF) listed on a U.S. exchange. The symbol for this ETF is DBC. I think this is a significant and positive addition to the list of available ETFs as it targets an asset class that is largely out of the reach of the small investor.

The commodities ETF will track six highly-liquid futures contracts on crude oil, heating oil, aluminum, gold, corn, and wheat. It is rebalanced annually to weights of 35%, 20%, 12.5%, 10%, 11.25%, and 11.25%, respectively. The fund will be charging 1.9% in expenses, but expectations are that income returns from the ETF will cover these expenses.

What was surprising to me is that Barclays Global Investors missed out on being the first to launch a commodities ETF. They made the same mistake with their gold ETF offering and now they find themselves in second place to StreetTrack's offering.

However, not to be outdone, Barclays recently filed a prospectus for an ETF based on the broad-based Goldman Sachs Commodity Index (GSCI). This new ETF tracks 24 commodities across the energy, metal, agriculture and livestock sectors. The expense ratio for Barclay's product is 0.75% which is high for an ETF, but much lower than the Deutsche Bank making it an alternative worth looking at. Part of this lower fee comes about due to the ETF's structure which has been set up so that it doesn't directly invest in the underlying futures. As a result, it won't incur the trading costs it would have if it actually owned and managed the futures contracts themselves.

Both of these commodities ETFs are heavy on energy. For the yet to be release Barclays ETF, crude oil, brent old, unleaded gas, heating oil, gas oil, and natural gas will account for 74.4% of the dollar value. That leaves only around 25% for industrial metals, precious metals, agriculture, and livestock. The argument for these weightings is based on the fact that they represent global production and demand. While that is most certainly true, I don't think it makes sense for someone looking for diversification. The Deutsche Bank ETF is a little better with “just” 50% in energy so for the time being it is the one I will be sticking with.

A potentially better alternative to the Barclay's and StreetTrack's offering is a relatively new German ETF that tracks the Jim Rogers International Commodity Index. Details are scarce, but only 44% of the holdings are in energy and the fund is comprised of 35 commodities making it more diversified offering.