3 Commodity ETFs To Invest On Goldman’s Commodity Prediction

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October 14, 2012 10:34pm NYSE:DBE NYSE:GSC

Eric Dutram: Commodities are gaining immense popularity recently due to heightened inflationary concerns resulting from Federal Reserve’s easy money policies. Most commodity ETFs

and ETNs tracking the broad market have gained at least double digits in the year-to-date period with massive growth coming from the latest Fed-induced stimulus measures.

This trend is expected to continue, according to a recent report from Goldman Sachs. The analysts at Goldman Sachs believe that the broad commodity markets – as represented by the S&P GSCI Enhanced Commodity Index – will rally over 18% over the next 12 months. (read: China ETF Investing 101) About half of the gains would be realized in the fourth quarter.

In fact, commodities return would outstrip that of equities and five-year corporate bonds, per Goldman’s forecast. The returns from these markets will likely be 9% and 2%, respectively, in one year. Notably, the 10-year Treasury bond will yield negative 3% returns during the 12-month period, as per their projection.

Further according to the report, energy and industrial metals (aluminum, nickel, zinc, iron) will lead the commodities market with 26.5% and 10% increase, respectively, while agricultural commodities will be the only laggards in the space, losing 5% over the next 52 weeks. (read: USAG In Focus As Agricultural Commodity ETFs Soar) Precious metals (gold and silver) and livestock would rise in the mid single-digit.

Goldman analysts view the recent sell-off in commodity prices to be an attractive entry point given the modest global economic growth and the impact of the rising commodity prices on economic growth and other asset classes, especially if oil supplies remain constrained.

Furthermore, with additional monetary stimulus flowing into the market, the sentiments regarding the commodities are turning positive of late, suggesting that it may be an appropriate time for investors to enter into these markets.

For investors interested in gaining exposure to the commodities, there are wide varieties of options, including ETFs and ETNs, available currently. An easy choice to play Goldman’s commodity forecast is with their own fund – Goldman Sachs Connect S&P GSCI Enhanced Commodity ETN (NYSEARCA:GSC), which tracks the same index that is expected to produce 18% returns (see more ETFs in the Zacks ETF Center).

Beyond GSC, we have highlighted the most suitable three ETFs that are poised to deliver attractive returns over the next year, if Goldman commodity prediction comes true:

iPath S&P GSCI Total Return Index ETN (NYSEARCA:GSP)

Investors looking to play the Goldman commodity forecast could find GSP a solid pick. Launched in June 2006, the fund provides exposure to the broad commodity markets and tracks the S&P GSCI Total Return Index. The index delivers returns through an unleveraged investment in the futures contracts on physical commodities comprising the index plus the rate of interest on specified T-Bills. (Read: Invest Like The One Percent With These Three ETFs)

In total, the product holds 24 different commodities in its basket with heavy weights going to the energy (72%) space, followed by agriculture (18%) and a 10% combined allocation to metals both industrial and precious. In terms of individual commodities, three energy products – WTI crude (38%), Brent oil (14%), and natural gas (6%) take the top three spots.

The fund charges a relatively higher 75 bps in annual fees while tight bid/ask spread minimizes the additional cost for the fund. It trades in good volumes of more than 62,000 shares per day. The product has managed assets of $113.8 million and produced returns of 1.42% so far in the year (as of September 27).

Since the product is heavily exposed to the commodity which Goldman predicts to be the top performer (energy), the note could generate excellent returns (~19%) over the next 12 months, though overall return for the ETN  may be slightly offset by the negative returns for agricultural products.


Another way to play the broad commodity markets is SBV, which tracks the S&P GSCI Total Return Index and provides exposure through futures contracts. Unlike many commodity indices, the index offers roll-into-one of a number of futures contracts with varying expiration dates, as selected by using the Barclays Capital Pure Beta Series 2 methodology.

With holdings of 23 securities, the fund is heavy on energy that makes up for 83% of assets, while agricultural and industrial metals account for 12% and 4% share, respectively. From an individual commodities perspective, three energy products – WTI crude (41%), Brent oil (19%), and gas oil (8%) – enjoy the top three positions in the basket.

Launched in April 2011, the product is slightly expensive as it charges 75 bps in fees per year and is rather illiquid. (Read: Use Caution When Trading These Three Illiquid ETFs) It trades in paltry volumes of 1,600 shares on an average daily basis that increases the trading cost in the form of bid/ask spread. The fund is unpopular and has attracted only $1.4 million of assets so far in the year. The fund gained around 1% year-to-date (as of September 27).

If Goldman’s predictions come true, then the note could exhibit an outstanding return of nearly 25% over the next 12 months.

PowerShares DB Energy Fund (NYSEARCA:DBE)

Investors playing on Goldman’s prediction could also focus purely on the energy sector with PowerShares’ ultra-popular DBE, as energy will be the strong performer returning 26.5% over the next 12 months. (read: Two Energy ETFs Holding Their Ground)

The product tracks the DBIQ Optimum Yield Energy Index Excess Return, which is a rules based benchmark consisting of some of the most heavily traded energy commodities in the world. DBE is the only product focusing on the broad energy commodity.

Launched in January 2007, the product holds five commodities with the vast majority tied up in oil and oil-derivatives. In fact, natural gas accounts for just 8% of the assets while WTI crude, RBOB Gasoline, Brent crude and heating oil make up for 21%, 23%, 23% and 24% share, respectively.

The note is liquid as it trades in volumes of more than 75,000 shares per day on average. As a result, the investor does not have to pay an extra cost beyond the expense ratio of 0.78%. The product attracted assets of $173 million and returned about 3% in the year-to-date period (as of September 27).

Since this note is structured as a limited partnership for tax purposes, it could produce some pains at the time of tax payments, such as a K-1 (read: ETF Investors: Beware The Coming ETN Backlash). Nevertheless, the fund could be a good choice for the risk tolerant investor, If Goldman’s prediction regarding energy holds true.

Written By Eric Dutram From Zacks Investment Research 

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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