Commodity Spotlight: Dow Jones-UBS Commodity Index Total Return ETN In Focus (DJCI, USO, UNG, JJC, DBA)

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October 31, 2011 2:03pm NYSE:DJCI

Michael Johnston: Just a few short years after the introduction of the first exchange-traded commodity product, there are dozens of options available for investors interested in accessing this asset class that is capable of delivering big returns and meaningful diversification benefits. Most investors are familiar

with only the largest and most popular of these products, but those willing to dig a bit deeper will uncover some very intriguing investment opportunities [see also Seven Reasons To Hate Gold As An Investment].

Today we profile the Dow Jones-UBS Commodity Index Total Return ETN (NYSE:DJCI), a product from UBS that offers broad-based exposure to basked of futures contracts.

Vital Stats

Here’s a quick overview of the basics of DJCI:

  • Issuer: UBS
  • Index: Dow Jones-UBS Commodity Index Total Return
  • Number of Commodities: 19
  • Largest Allocation: Crude Oil (14.7%)
  • Inception Date: October 28, 2009
  • Maturity Date: October 31, 2039
  • Expense Ratio: 0.50%
  • Assets: $23.4 million (as of 10/25/2011)
  • Structure: ETN

Under The Hood

DJCI seeks to replicate the Dow Jones-UBS Commodity Index Total Return, a benchmark that consists of 19 different commodity futures contracts. The base weights for the component futures contracts are presented in the following table:

Natural Gas 11.22%
Crude Oil 14.71%
Unleaded Gasoline 3.50%
Heating Oil 3.58%
Live Cattle 3.36%
Lean Hogs 2.00%
Wheat 4.61%
Corn 6.98%
Soybeans 7.86%
Soybean Oil 2.94%
Aluminum 5.20%
Copper 7.54%
Zinc 2.85%
Nickel 2.25%
Gold 10.45%
Silver 3.29%
Sugar 3.33%
Cotton 2.00%
Coffee 2.36%

The nature of the underlying index ensures that investors in DJCI have broad-based exposure to commodities, including energy, precious metals, agriculture, and industrial metals. There are a few commodities that are not found in the DJCI portfolio, including platinum, palladium, cocoa, and timber.

Noteworthy Features

There are several noteworthy features of DJCI, beginning with the structure of this product. As an ETN, DJCI exposes investors to the credit risk of the issuing institution, which may scare some investors away. But it’s important to note that there are a number of potential benefits to the ETN structure when it comes to commodity exposure as well, including the ability to avoid tracking error and brokerage fees, which can become significant in futures-based strategies [see also Agriculture ETF Showdown: CROP vs. MOO].

Like all broad-based commodity ETPs, DJCI offers exposure not to spot commodity prices, but to an index comprised of exchange-traded futures contracts. As such, it is important to note that the slope of the futures curve can impact the returns realized by this ETN, and that returns realized can lag behind the hypothetical return on spot prices.

Finally, note the expense ratio of DJCI; at just 0.50%, this product is one of the most cost efficient commodity ETPs on the market. In fact, this ETN is linked to the same index as the popular DJP, but charges 0.25% less than that fund [see also Three Things Wall Street Journal Didn’t Tell You About Commodities].

How To Use

DJCI can be used in a number of ways, including as a means for establishing cheap, low maintenance access to commodities within a long-term, buy-and-hold portfolio. Because this instrument is rather blunt–it includes 19 different commodities–those looking to bet on movements of a specific natural resource may want to use the more targeted products out there [see also 25 Ways To Invest In Silver].

DJCI can also be useful as a short-term trading tool for investors seeking to capitalize on short-term mispricings in the commodity market.

Written By Michael Johnston From CommodityHQ

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.

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