Eric Dutram: Economic uncertainty all over the world has taken a toll on equity markets, rendering them highly unpredictable at this time. Some respite comes from commodities like precious metals, but even these have seen some weakness thanks to a stronger dollar.
Beyond a strong dollar, commodities have also experienced weakness thanks to a sluggish global economic outlook. Concerns have centered on the deepening Euro zone debt crisis and a dismal U.S. job scenario, both of which have kept commodity prices under pressure in 2012 (Read: Precious Metal ETFs Slump On Bernanke Testimony).
Despite these conditions, there have been a couple winners so far this year, although they have been few and far between. Seemingly, these top performers could act as a safe haven in the current market storm or could at least hold up better than their counterparts if the markets continue to remain sluggish (Read:Cocoa ETFs: The Safe Haven In Agricultural Commodities?)
Interestingly, the top performers haven’t been focused on any particular sector but have been spread out among the various commodity groups. This suggests that there have been winners in every corner of the space, implying that investors who have been burned by broader based commodity funds this year may want to consider looking at any of the following commodity ETFs that we have highlighted below:
E-TRACS Natural Gas Futures Contango ETN (NYSEARCA:GASZ)
Though the ramp up of natural gas production and subsequent supply glut weighed on natural gas prices, this fund generated exciting returns of more than 11% during the last five months in the current turmoil. (Read: Have The Natural Gas ETFs Finally Bottomed Out?) This is primarily driven by its contango effect in natural gas markets, where longer-dated contracts are more expensive.
The fund takes short positions in the near-term expiry futures contracts and long positions in the mid-term expiry futures contracts. As mid-term contracts are priced at higher prices than near-term contracts, the fund capitalizes on the price difference in the form of higher returns.
With AUM of $12.2 million, the ETN seeks to match the performance of the ISE Natural Gas Futures Spread Index. The product is less volatile and trades in small volumes say nearly 10,000 per share on a daily basis. The fund seems costly relative to other ETFs in the space, charging investors a fee of 85 bps annually, although it does arguably have a more advanced strategy.
Teucrium Soybean Fund (NYSEARCA:SOYB)
This fund surged more than 7% in the past five months since soybean prices reached an all-time high due to lower plantings of the key crop. The fund also benefited from the reduced effects of backwardation and contango.
Investors seeking direct exposure to soybean may find this fund an intriguing option. The product invests in three soybean futures contracts, each having their own weightings in the basket. These three futures contracts expiring November 2012, January 2013 and November 2013 have weightings of 35%, 30%, and 35%, respectively.
The fund has assets of about $4.5 million under its management and is less liquid with small daily trading volume. The product is the high cost choice in the space as it charges a fee of about 100 bps per year. Further, a large bid/ask spread increases the cost of investment to those who are looking to make a quick trade.
Another segment which has been strong in the commodity world this year has been that of the silver market. The white metal has managed to add about 6% on the year, outpacing many other products in the space.
Silver has largely been assisted by the fact that not only is it a precious metal and a store of wealth, but it also has a number of key industrial applications as well. Thanks to this, the metal can perform better during uncertain market conditions where industries haven’t gone down the tubes, making it a solid investment during this type of market (Read: Silver ETFs Outshine Gold).
In order to play silver, ETF investors have a variety of options at their disposal. Three of the most popular are DBS, SIVR, and SLV, each of which we have briefly highlighted below:
PowerShares DB Silver Fund (NYSEARCA:DBS)
DBS seeks to replicate the performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Silver Excess Return, before fees and expenses. The fund provides exposure in the futures market rather than spot market.
The product has $68.9 million of assets under its management and uses the passive approach. It charges an annual fee of 50 bps per year and is highly volatile. The fund trades good volumes of about 17,000 per share on average daily basis.
ETFS Physical Silver Shares (NYSEARCA:SIVR)
With AUM of $472.2 million, the fund tracks the spot price of silver bullion, net of fees and expenses and own silver bars to back the shares. SIVR is backed by physical silver under the custody of HSBC Bank USA in London.
The fund is highly traded and provides ample flexibility. It offers simple and cost-efficient ways to investors seeking exposure to silver bullion. The product is the low cost choice in the commodity space charging investors a fee of 30 bps per year with low bid/ask spread and good tracking error.
iShares Silver Trust ETF (NYSEARCA:SLV)
The fund seeks to match the spot price of silver bullion, net of fees and expenses. It is backed by physical silver under the custody of JP Morgan Chase Bank in London (See more ETFs in the Zacks ETF Center).
The product is highly traded and is one of the largest ETFs in the space with assets of $8.5 billion under its management. It offers investors an easy and potentially lucrative method for gaining exposure to the price of silver. Unlike SLVR, this fund is quite expensive with an expense ratio of 0.50%.
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