Archive | Commodity ETFs

17 December 2010 ~ 0 Comments

Dealing with Contango

Investing in commodities has been made much easier by the advent of exchange traded funds.  However, one issue that has been a drag on returns and has investors scratching their heads is contango.

Contango, and its opposite number — backwardation, occurs in funds that track commodity prices with futures contracts.  Since the contracts have a limited life, the fund has to periodically roll over its position into new contracts.  When the new contracts are pricier than the existing contracts, contango for short, investors give up some gains to retain their exposure.

In the article Getting Tripped Up by Contango, Carolyn Ciu points to the U.S. Oil Fund (USO) as a prime example of a fund that has been hurt by the rollover problem.  USO has fallen 44% since the fund’s 2006 launch while spot prices have risen 28% over the same period.

To dilute the contango effect, some funds spread their exposure across multiple contracts or are more selective about which contracts to buy.  For example, the PowerShares DB Oil Fund (DBO) chooses the cheapest forward contract to roll into.

To avoid contango altogether, some commodity funds simply purchase and store the physical assets.  For example the SPDR Gold Shares (GLD) stores $57 billion of gold in vaults in London.  The fund’s manager even maintains and publishes a list of the gold bars that the fund owns and holds.

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16 June 2010 ~ 0 Comments

Strong Dollar Hurting Copper ETFs

Copper ETFs are Seeing Red in 2010 according to the WSJ’s John Spence.

Turns out that the strengthening US dollar is bringing down commodity prices.  Combine that with a more uncertain economic outlook and funds that specialize in economically sensitive commodities like copper take a hit.

Spence highlights two copper exchange traded products – the iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC) and First Trust ISE Global Copper Index Fund (CU).

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07 June 2010 ~ 0 Comments

Buying Gold at the Top

The market correction and the European debt crisis have renewed investors’ interest in gold, pushing the commodity’s price levels to new highs.

Is there a way to safely buy gold at these levels without exposing your portfolio to the risk of a sudden crash in gold prices?  That’s the question asked by the WSJ’s Brett Arends in the article Playing Gold Without Getting Killed.

Arends suggests that instead of buying the SPDR Gold Shares (GLD) ETF, investors should consider buying call options on gold.  Options provide upside exposure while limiting downside losses.

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20 January 2010 ~ 0 Comments

Platinum and Palladium Get a Lift from ETFs

Platinum and palladium prices are climbing higher thanks to the recent introduction of two new ETFs according to a WSJ article by Matt Whittaker and Carolyn Cui.

The ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL) began trading on January 8.  Since that time, both funds have each accumulated 100,000 ounces of the metals commonly used by the automotive industry for catlytic converters.

Thanks in part to the demand created by the new funds, prices for both metals have risen steadily since the beginning of the year.

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24 December 2009 ~ 0 Comments

Silver and Gold as Diversifying ETFs

Stocks and commodities have moved in lock step over the past 15 months, thwarting investors seeking to diversify their portfolios. However, silver and gold proved to be able diversifying investments.

In the article Stocks, Commodities Are Unlikely Buddies, the WSJ’s San Mamudi reports that funds that track the S&P 500 are up 26% this year while commodities are up 22%. Both asset classes tanked in 2008 and have declined on an annualized basis over the past three years.

On the other hand, gold was up 6.6% in the period September – December 2008 while the S&P 500 plunged 30%. Over the past three years, gold is up 10.6% on average.

The largest gold ETF is the SPDR Gold Trust (GLD) which holds physical gold. Silver, which has performed similar to gold, can be held through the iShares Silver Trust (SLV).

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02 November 2009 ~ 0 Comments

Gold Mutual Funds vs Gold ETFs

The Journal‘s Tom Lauricella recently took a look at whether investors should own gold stocks or ETFs that track the price of gold.

Since gold miners have leveraged exposure to the price of gold, gold mining stocks tend to be more volatile than the price of the metal. Gold stocks are also subject to other risks such as production delays or being swept up in a broader market move. For example, at the height of the financial panic, the SPDR Gold Shares (GLD) was down 21% while the average precious metals stock fund lost 52%.

In addition to GLD, Lauricella also mentions the iShares Comex Gold Trust (IAU) as an alternative way to gain exposure to the price of gold.

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16 September 2009 ~ 0 Comments

Oil ETF Returns Watered Down

ETFs that are supposed to track the spot price of oil have underperformed this year.

In the column Exchange-Traded Funds Miss Oil Gusher, the WSJ’s John Jannarone writes that although oil prices have soared 51% this year, the largest oil ETF, U.S. Oil Fund (USO), has risen 8%.

USO attempts to track the spot price movements of crude oil by buying the near-month futures contract. However, a glut of physical oil has caused spot prices to trail futures prices, a market condition known as “contango”. The net result is that USO’s performance has not kept up with the spot oil market.

USO is not alone in terms of performance problems. An ETF that takes a different approach to the futures market, the U.S. 12 Month Oil Fund (USL), invests in oil futures contracts across a 12-month period and has done better than USO but still lags behind spot prices in 2009.

As an alternative to USO, Jannarone recommends Anadarko Petroleum (APC), an oil exploration company that has broadly matched oil-price rises this year and pays a dividend.

ETFs with material stakes in Anadarko include the Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO) with 7% of the fund invested in APC and PowerShares Energy Exploration & Production Portfolio (PXE) with a 5% stake.

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22 August 2009 ~ 0 Comments

Small ETF Investors Squeezed Out by Regulators

US regulators’ war on speculation is resulting in collateral damage – the small investor.

According to the WSJ’s Brian Baskin‘s article Small Investors Face Big Hit in ETF Push, exchange-traded fund investors are victims of the CFTC’s crack down on commodity markets. Commodity ETFs have ballooned to $59.3 billion by providing small investors an avenue for gaining exposure to commodity futures.

Baskin points out that several ETFs and ETNs have been affected by recent regulatory actions including the United States Natural Gas Fund (UNG), PowerShares DB Oil Fund (DBO), PowerShares DB Crude Oil Double Long ETN (DXO) and iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (GAZ).

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20 August 2009 ~ 0 Comments

Option Traders Expect More Volatility for Gold Miners

The WSJ‘s Tennille Tracy is reporting that options traders are preparing for increased volatility in the stocks of gold mining companies.

In yesterday’s trading, options investors were establishing a “strangle” position in the Market Vectors Gold Miners ETF (GDX) by buying March $30 puts and March $45 calls. The position will only be profitable if the exchange traded fund trades above $49.60 or below $25.40 before mid-March.

The ETF invests in a broad range of range of small-, medium- and large-cap gold mining companies.

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03 August 2009 ~ 0 Comments

Are ETFs Driving Commodity Prices?

John Hyland, CIO of U.S. Commodity Funds, is one of several people expected to testify on Wednesday at a Commodity Futures trading commission hearing on the issue of speculation.

The question to be answered, according to WSJ reporter Carolyn Cui, is whether commodity ETFs are influencing the price of the futures they are designed to track.

The U.S. Natural Gas Fund (UNG) has grown from $727 million to $4.5 billion in assets under management in just four months. The U.S. Oil Fund (USO) is at $2.7 billion in assets.

The U.S. Natural Gas Fund ran out of new shares to sell in June which means it hasn’t had money to buy new contracts.

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