ETFs

4 Commodity ETFs Destined To Prosper

By Kevin Grewal

As economies around the world continue to grow and develop, commodities are likely to remain attractive and for good reason.

Emerging markets are anticipated to grow at exponential rates in the coming year.  China is expected to grow at a rate greater than 8%, India is expected to grow close to 7% and other nations in Africa and Latin America are expected to show some signs of prosperity as well.  To add to this growth, developed nations like the United States are expected to grow which will further bolster upward pressure on commodity prices.

In fact, supply and demand forces have already been taken putting pressure on commodity prices evident through the recent uptick seen in the Batic Dry Index (BDI).  The BDI is an efficient indicator of future economic growth and production and measures the price of shipping dry bulk.   As international demand of commodities increases, the price to ship dry bulk generally increases as well.

Another factor to consider is the growth and emergence of the middle class in developing nations.  As incomes rise and some of these nations start to decouple from the West, the demand for more nutritious foods, better infrastructure and an overall improved way of life will likely follow.  In fact, a recent study indicated that the demand for automobiles in China is surging and the purchases of tractors in India have been increasing at rates greater than 20%.  These trends are also prevalent in parts of Latin America, Africa and Eastern Europe.   The end result is an increase in demand for steel, rubber, fuel, oil, seed, fertilizer and other commodities. The trends will likely continue as populations in these regions of the world are expected to continue to increase.

In a nutshell, the expected increases in the international demand for commodities in general will likely outpace supply and result in upward price pressures.  Some goods ways to capitalize on this and gain broad based exposure to commodities include:

  • the iShares S&P GSCI Commodity-Indexed Trust (GSG), which tracks  24 different commodities and gives exposure to energy, agriculture, livestock and industrial metals.  GSG closed at $30.28 on Friday.
  • the iShares S&P Global Materials Sector Index Fund (MXI), which gives exposure to commodity-driven companies like BHP Biiliton (BHP), Monsato Company (MON) and Potash Corporation (POT).  MXI closed at $59.01 on Friday.
  • the PowerShares DB Commodity Index Tracking (DBC), which gives exposure to crude oil, copper, wheat, aluminum and other commodities.  DBC closed at $23.52 on Friday.
  • the iPath Dow Jones-AIG Commodity Idx TR ETN (DJP), which is a note that tracks a broad base of commodities.  DJP closed at $40.67 on Friday.

When investing in these commodity-based equities, it is equally important to consider the volatility and inherent risks that are involved.  To help mitigate these risks, the use of an of an exit strategy which triggers price points which represent abnormal price weaknesses and an increased likelihood that further price weaknesses in commodities are likely to follow is of importance. 

According to www.SmartStops.net, the price points for the previously mentioned ETFs are: GSG at $29.62; MXI at $57.71; DBC at $23.07; DJP at $40.06.  These price points fluctuate on a daily basis and are reflective of market conditions and volatility. Updated data can be found at www.SmartStops.net.  These price points change on a daily basis as market conditions fluctuate and updated data can be accessed at www.SmartStops.net.

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