Despite the encouraging data from China and Europe, commodities have shown a sharp fall after the Syria tension eased. Obama put the strike on hold after Syria accepted Russia’s proposal of surrendering its chemical weapons to international control for their ultimate destruction.
Additionally, growing worries about the U.S. Fed scaling down its monetary stimulus anytime soon are weighing largely on the prices, in particular, of precious metals.
Given the bearish fundamentals, Goldman Sachs (GS), lowered its expectation for commodity returns. According to Jeffrey Currie, an analyst at GS, the broad commodity markets – as represented by the S&P GSCI Enhanced Commodity Index – will fall 2% over the next 12 months.
In fact, the analyst calls for a 15% decline in precious metals, 7% in agricultural products and 1% in energy while the lone winner is expected to be industrial metals with a 2% gain over the next 52 weeks (see all the Inverse Commodities ETFs here).
The firm predicts gold prices to decline in 2014 on fast-improving U.S. economic growth conditions and less accommodative monetary policy. On the other hand, it expects demand in China, the major driver of industrial metals, to continue growing in the coming months.
Investors seeking to ride on Goldman’s views on commodities can choose from a wide variety of products, including ETFs and ETNs. Below, we have highlighted three ETFs which we think could be well positioned if Goldman Sachs’ commodity predictions come true in the months ahead:
PowerShares DB Commodity Short ETN (DDP)
Investors looking to play the bearish Goldman view in the broad commodity space could find this inverse ETN a solid pick. The product seeks to provide inverse (opposite) return of the performance of the Deutsche Bank Liquid Commodity Index through an unleveraged investment in the futures contracts plus the rate of interest on T-Bills.
In total, the product holds six different commodities in its basket with heavy weight going to the energy (59%) space, followed by agriculture (20%), industrial metals (12%) and precious metals (9%). The ETN has been able to manage $5.8 million in its asset base while charging 75 bps a year from investors (read: 3 Top Performing Energy ETFs in Focus Now).
The product lost nearly 20.5% so far this year but is expected to generate returns of 3.1% over the next 12 months if the Goldman prediction comes true, though overall return for the ETN may be slightly offset by the positive returns for industrial metals.
PowerShares DB Gold Short ETN (DGZ)
Investors playing on Goldman’s prediction could also focus purely on gold bullion with PowerShares’ inverse DGZ, as precious metal will be a weak performer over the next 12 months.
The ETN tracks the inverse performance of the DBIQ Optimum Yield Gold Index Excess Return through a single gold futures contract plus the interest income from U.S. Treasury bills. The product has an opposite relation to the movement of gold prices and thus creates a short position in the underlying index (read: 4 Ways to Short Gold with ETFs).
The note has managed assets of $27.1 million so far in the year while charging 0.75% in expense ratio. DGZ has added over 18% year-to-date.
PowerShares DB Base Metals Fund (DBB)
Since industrial metals are the only commodities that are expected be profitable with 2% gain according to Goldman, investors could find DBB an intriguing pick. The ETF tracks the DBIQ Optimum Yield Industrial Metals Index Excess Return, which is a rules-based index consisting of futures contracts on some of the most heavily traded base metal commodities in the world.
The product holds three commodities – aluminum, copper and zinc – in almost equal weight. The fund has amassed $263.2 million in its asset base while charging 78 bps in annual fees.
The ETF delivered negative returns this year, losing over 14% so far, but this could turn around in the weeks ahead. We are also bullish on industrial metals over the next one year, assigning this ETF a Zacks ETF Rank of 2 or ‘Buy’ rating.
This article is brought to you courtesy of Eric Dutram.