Why Commodities ETFs Can Deliver More Upside

Markets ETF Trends

The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related exchange traded fund, is on firm footing while the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the exchange traded fund proxy for the U.S. Dollar Index (DXY), continues scuffling.

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The weak dollar is seen as just one of several catalysts that could propel commodities exchange traded products higher this year. DBC tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which “is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world,” according to PowerShares.

Commodities currently on DBC’s roster include West Texas Intermediate oil, Brent crude, gasoline, gold, silver, wheat, soybeans, corn, natural gas, sugar, aluminum, zinc and copper.

“A weak US dollar can also provide a tailwind to commodities,” said Invesco in a recent note. “This is because most major commodities are priced in US dollars. When the dollar falls in a broad fashion against other currencies around the world, commodities tend to rise in US dollar terms. And because the borrowings of many emerging market countries are also denominated in US dollars, a weak dollar can reduce the debt burden of these economies.”

Commodities are a solid alternative to diversify a traditional portfolio of stocks and bonds. Commodities have historically acted as a good portfolio diversifier that zigs while traditional assets like stocks and bonds zag.

commodity exchange traded funds are finally beginning to turn some heads as investors seek out alternative assets to diversify potential turns in traditional assets like stocks and bonds.

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For instance, despite the depressed inflationary environment, many still expect inflation to at the very least hit the Federal Reserve’s 2% target ahead. However, inflationary spikes could catch some off guard.

“In fact, over the past 15 years, commodities have experienced a more than 0.80 correlation to changes in the CPI — higher than US and other developed-market equities, REITs and even Treasury Inflation-Protected Securities (TIPS),” according to Invesco. “With US economic growth accelerating, global economies on the mend and interest rates still historically low, the risk that inflation exceeds the Federal Reserve’s long-term target of 2% is on the rise, as illustrated by 10-year TIPS break-even rates, which represent the difference in yield between 10-year Treasury bonds and TIPS. TIPS break-even rates provide a rough gauge of investors’ expectations for inflation.”

For more information on the commodities market, visit our commodity ETFs category.

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