Gold has been a decent performer this year, but the same cannot be said of other commodities and the corresponding exchange-traded funds (ETFs). Natural gas, oil and silver are among the popular commodities that are being taken to task, prompting investors to ponder the near-term fate of the broader commodities complex. Familiar issues are weighing on commodities and diversified ETFs tracking the space, including the PowerShares DB Commodity Index Tracking Fund (DBC PwrShs DB Cmdty Idx Shs PowerShares DB Commodity Index Tracking Fund DBC 14.63 +0.07%).
For example, increased output by U.S. shale producers is weighing on oil prices, as are concerns that the Organization of Petroleum Exporting Countries (OPEC) will prove ineffective at curbing production. Specifically, it is expected that OPEC member Libya will soon increase oil output. Additionally, concerns about the strength of the Chinese economy, the world’s second largest and a major driver of global commodities demand, are weighing on industrial metals prices. DBC, which is a broad-based commodities play, is down 8 percent year to date and 6.2 percent over the past month. (See also: OPEC to Look at Extending Oil Production Cuts.)
However, some market observers argue that the recent commodities decline presents investors with a buying opportunity. “Investors are now presented with the best buying opportunity in energy commodities since before the production-cutting agreement last November among members of OPEC,” said PowerShares in a recent note. “When it comes to crude oil prices, it’s all about supply. Global demand has shown a consistent trend for 25 years. But when sentiment is shaky, it doesn’t take much to squeeze wary investors from the market. And, true to form, some wary market participants have grown impatient with the delay in the drawdown of U.S. crude oil inventories.”
DBC tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which holds multiple commodities. The ETF “is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world,” according to PowerShares. (See also: DBC: PowerShares DB Commodity Tracking ETF.)
The $1.94 billion DBC currently allocates nearly 25 percent of its weight to West Texas Intermediate and Brent crude, its two largest commodities exposures. Although DBC features industrial and precious metals allocations, oil is the biggest factor in this fund’s price action. “Energy speculators have been highly focused on U.S. crude oil reserves, and many lost patience while the markets rebalanced in Europe and Asia,” notes PowerShares. “A roughly 5 percent sell-off in West Texas Intermediate crude on May 4 had all the hallmarks of a capitulation in a market where sentiment has grown shaky.”
Investors have pulled $396.2 million from DBC this year, making the ETF the worst outflows offender in the PowerShares stable.