Commodity Spotlight: Dow Jones-UBS Commodity Index Total Return ETN In Focus (DJP, USO, DBA, DBC, DBO)
Stoyan Bojinov: Just a few short years after the introduction of the first exchange-traded commodity product, there are several dozens of options available for investors interested in accessing this asset class. Interest in commodities has surged as this corner of the market has demonstrated the potential to deliver impressive returns and meaningful diversification benefits [see also Three Commodity Plays For 2012]. Today we profile the Dow Jones-UBS Commodity Index Total Return ETN (NYSEARCA:DJP), a product from Barclays iPath that has amassed nearly $2.6 billion in assets under management since launching in mid-2006.
Here’s a quick overview of the basics of DJP:
- Issuer: Barclays iPath
- Index: Dow Jones-UBS Commodity Index Total Return
- Number of Commodities: 10
- Largest Allocation:Crude Oil (17.3%)
- Inception Date: 06/06/2006
- Maturity Date: 06/12/2036
- Expense Ratio: 0.75%
- Assets: $2.58 billion (as of 1/16/2012)
- Structure: ETN
Under The Hood
DJP seeks to replicate the Dow Jones-UBS Commodity Index Total Return, a broad-based benchmark that includes futures contracts linked to ten of the most widely traded natural resources. The base index weights for each commodity family are listed below (as of December 31, 2011):
Perhaps the most appealing feature of this ETN is the underlying portfolio; DJP offer an exceptional balance amongst its holdings, allocating assets to corners of the market, such as livestock, which are often times entirely omitted from other so-called “broad-based” products. Another noteworthy aspect of DJP is the product structure; DJP is subject to the credit risk of the issuing institution since it is a senior debt instruments. While that risk can’t be ignored completely, there are several advantages to achieving commodity exposure through the ETN wrapper [see How To Lose Money Investing In Commodities]. Unlike ETFs comprised of futures contracts such as DBC, commodity ETNs will not require investors to fill out a K-1 at the end of the year; this means that there is no annual mark-to-market that spurs a taxable event. Investors in DBC will have to record a gain or loss annually, while those who purchase DJP only have to do so upon sale.
This ETN may also appeal to cost conscious investors as it is available for commission free trading on the TD Ameritrade platform.
How To Use
DJP can be used in a number of ways, including as a core holding in buy-and-hold portfolios for investors looking to establish cheap, low maintenance exposure to commodities over the long-haul. Although this ETN features excellent balance and diversity amongst its holdings, it’s not without its flaws; DJP is linked to the same index as DJCI, both are ETN’s, except DJCI charges 0.25% less in expense fees. All in all, it’s difficult to justify owning this product when there is a cheaper option available with the same structure and same underlying index [see DJCI Spotlight].
Written By Stoyan Bojinov From CommodityHQ Disclosure: No positions at time of writing.
CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.