The ABCs of the DBC
Commentary: New commodities ETF as a hedging tool
By Jeff Manera, Superstock Investor
Last Update: 12:01 AM ET Mar 1, 2006
Editor's note: Jeff Manera is the executive editor of Superstock Investor and editor/chief trader at Powerhouse Options, a fast-moving options trading service. (superstockinvestor.com)
BOCA RATON, Fla. (MarketWatch) -- Oil prices have proved extremely volatile and unpredictable, as unexpected changes in inventory or events from the geopolitical front (such as terrorist strikes on Nigerian oil wells or nuclear blustering from Iran), cause whipsaw changes in the slippery stuff's spot and futures prices.
Up until now, ways to bet on this volatility have been limited for the average investor not active in futures trading. They could trade the Oil Service Holdrs (OIHOIH
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) , which is 100% concentrated in oil services companies such as Halliburton and Baker Hughes, or the SPDR Energy (XLEXLE
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) exchange-traded fund, which has its largest concentration in the big oil companies, such as Exxon Mobile, Chevron and ConocoPhillips. More energy related ETFs.
Now, with the Feb. 3 launch of a new fund (in fact a whole new type of fund), investors have a totally different way to participate in the oil and energy game.
I recommended the DB Commodity Index Tracking Fund (DBCDBC
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) in the February issue of Superstock Investor immediately after the ETF-like fund launched. This issue also included other non-equity positions to add exposure to international equities and currencies and to partially hedge against any sudden decline in the U.S. financial markets.
More recently I had a very informative chat with Kevin Rich, director in the commodities asset structuring group at Deutsche Bank, to get a more in-depth perspective on this interesting investment vehicle.
Here's the scoop:
The DBC looks and acts like an ETF, but its structure more closely resembles that of a commodity pool. This is the first ETF-like product offered on a U.S. stock exchange providing direct exposure to a diverse basket of commodities. Like an ETF and unlike your typical mutual fund, the DBC's share price is updated intraday and the shares can be traded throughout the day.
The fund and the underlying index it closely tracks (the Deutsche Bank Liquid Commodity Index) focuses on six key global commodities with liquid derivatives and futures contracts with the following weightings: Light sweet crude 35%, heating oil 20%, gold 10%, aluminum 12.5%, corn 11.25% and wheat 11.25%. It will be rebalanced back to these levels each November.
As I mentioned earlier, the DBC is a new way to play oil and energy, with its 55% concentration in crude and heating oil, but I believe this fund, with its exposure to a basket of global commodities, is even more valuable as a diversifying component of an investment portfolio.
The real value of this fund is how it can diversify the typical investment portfolio, which is concentrated in U.S. equities and bonds. Global commodities have one of the lowest correlations to U.S. equities or bonds -- and including commodities in a typical portfolio is a smart way to reduce the portfolio's volatility and increase its risk-adjusted returns. Plus, the six commodities within the fund are lowly-correlated with each other, which should serve to reduce the volatility of the DBC itself.
The energy futures are rolled monthly, the others annually. Deutsche has structured it this way to potentially capture additional gains from the predictable way the different futures contracts often behave near their expirations. It's not a sure thing, but over time this is a clever way to potentially add to the fund's returns.
The DBC is also structured to earn interest income on cash invested in the fund through investment in a portfolio of high-quality bonds and other interest-bearing investments (which should more than offset the fund's modest management fee). In short, this fund offers a smart and easy way to invest in global commodities and diversify your portfolio. |
