Commodity ETN Spotlight: DPU In Focus

Exchange-traded products have become the preferred instrument for many investors looking to add core, as well as tactical, commodities exposure to their portfolios. Investors can choose from an ever-expanding “toolbox” for the right instrument that suits their needs, with some funds focusing in on a specific commodity, while others offer broad-based exposure. One of the offerings in the space is the PowerShares DB Commodity Long ETN (DPU), which has accumulated close to $6 million in assets under management since launching in April of 2008 [see also 12 High-Yielding Commodities For 2012].

DPU tracks the Deutsche Bank Liquid Commodity Index, which gives investors access to a basket of six very different commodities, resulting in a unique risk/return profile that may appeal to some more than others.

Vital Stats

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

  • Issuer: Invesco PowerShares
  • Index: Deutsche Bank Liquid Commodity Index
  • Number of Commodities: 6
  • Largest Allocation: Crude Oil (37.71%)
  • Inception Date: April 28, 2008
  • Expense Ratio: 0.75%
  • Assets: $5.5 million (as of 12/27/2011)
  • Structure: Exchange-Traded Note

Under The Hood

DPU seeks to replicate the Deutsche Bank Liquid Commodity Index, which is designed to reflect the performance of certain wheat, corn, light sweet crude oil, heating oil, gold and aluminum futures contracts plus the returns from investing in 3 month United States Treasury Bills. The index breakdown by commodity is presented in the following table (as of 12/27/2011) :

Commodity
Index Weight
Light Crude 37.71%
Heating Oil 19.47%
Corn 10.82%
Gold 9.06%
Aluminum 12.07%
Wheat 10.88%

DPU features allocations across all of the major commodity families, including exposure to energy, precious metals, agriculture, as well as industrial metals. However, investors should note that this ETN’s underlying portfolio is far from balanced; DPU is heavily tilted towards energy commodities, which account for well over half of total assets [see Crude Oil Guide: Brent Vs. WTI, What's The Difference?].

Noteworthy Features

In terms of product structure, DPU is an ETN so investors are faced with the inherent credit risk from the underlying institution, Deutsche Bank. However, with that being said, we feel that ETNs are the preferred product structure for accessing the commodity space. Futures-based ETFs, such as the popular DBC, require investors to fill out a K-1 tax form at the end of every year. With ETNs on the other hand, there is no annual mark-to-market that spurs a taxable event, and shareholders of GSC have to record a loss or gain only upon sale. This advantageous tax treatment grants investors more control over their tax liabilities, and can be a huge benefit for those looking to establish long-term commodity exposure in their portfolios [see Three Commodities Ripe With Political Risk].

From a composition perspective, DPU is similar to other funds from the PowerShares family; its portfolio is tilted towards energy commodities, with no allocations to livestock, and average weightings to grains and metals. Far from balanced, DPU’s quirky portfolio may appeal to those looking to only invest in some of the most liquid commodities in the space and do not care about less important products that generally do not trade as often. Investors should also note that the fund collateralizes the investment with short-term Treasury bills, helping to juice the return of the fund in shaky markets.

How To Use

DPU could appeal as a complimentary holding for investors looking to overweight exposure to the energy sector. This ETN may be useful to investors seeking relative balance in their exposure but want to maintain a high weighting in the dynamic energy market. DPU is however one of the less liquid commodity funds on the market, potentially turning away short-term traders who require tight bid-ask spreads. All in all, investors seeking broad, well-rounded commodity exposure for the long-haul, may be better off with a cheaper alternative like DJCI.

 

Disclosure: No positions at time of writing.

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Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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