Commodity ETP Spotlight: DBC In Focus

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 Agricultural ETF Showdown: CROP vs. MOO].

Today we profile the DB Commodity Index Tracking Fund (DBC), one of the oldest and most popular broad-based commodity ETPs on the market.

Vital Stats

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

Under The Hood

DBC seeks to replicate the DBIQ Optimum Yield Diversified Commodity Index Excess Return, a benchmark that consists of 14 different commodity futures contracts. The index and base weights for the component futures contracts are presented in the following table (as of 10/31/2011) :

Commodity Contract Expiry Date Index Weight Base Weight
Aluminium 9/19/2012 3.52% 4.17%
Brent Crude 2/14/2012 13.98% 12.38%
Copper – Grade A 3/21/2012 3.72% 4.17%
Corn 12/14/2011 6.25% 5.63%
Gold 2/27/2012 9.27% 8.00%
Heating Oil 5/31/2012 13.94% 12.38%
Light Crude 6/20/2012 11.66% 12.38%
Natural Gas 9/26/2012 4.28% 5.50%
RBOB Gasoline 11/30/2011 13.59% 12.38%
Silver 12/28/2011 2.35% 2.00%
Soybeans 11/14/2012 5.31% 5.63%
Sugar #11 6/29/2012 5.18% 5.63%
Wheat 7/13/2012 3.85% 5.63%
Zinc 7/18/2012 3.10% 4.17%

DBC is diversified across all major segments of the commodity market, including exposure to energy, precious metals, agriculture, and industrial metals. However, its underlying portfolio is heavily tilted towards energy commodities, which account for roughly half of total assets. Investors should also note that DBC does not include allocations to livestock (i.e. cattle and hogs) commodities.

Noteworthy Features

There are several noteworthy features of DBC, beginning with the structure of this product. DBC sets itself apart from other offerings in the space because it is structured as a partnership that invests in futures contracts. As such, the IRS requires that this fund is marked to market at the end of each calendar year, at which point investors are apportioned a pro rata share of gains or losses. In other words, taxes will be incurred on positions in DBC annually, regardless of whether or not shares in the ETF were sold during the year. For investors with a long-term time horizon, that feature may be less than optimal, since a period of strong gains may result in a significant tax liability. Investors should also note that shareholders of DBC will be required to complete a Form K-1 annually, which increases the administrative burden associated with this product.

DBC features several advantages in addition to offering easy access to a diverse basket of commodity futures [see also Three Things Wall Street Journal Didn’t Tell You About Commodities]. This fund is by far the most liquid broad-based commodity ETP on the market, which increases its appeal amongst active traders who are looking to move in and out of position with tight bid-ask spreads. DBC also features an extremely active options market, allowing for seasoned investors to implement an array of hedging strategies. Lastly, DBC is available for commission free trading to TD Ameritrade and Firstrade account holders.

How To Use

DBC can be used as a tactical tool for achieving cheap, low maintenance exposure to commodities within a long-term investment portfolio. However, the exclusion of several important commodities and its heavy energy bias make it less than appealing for those in search of deep, well-rounded exposure across all of the commodity families [see also Crude Oil Guide: Brent Vs. WTI, What's The Difference?].

DBC is perhaps most appealing to active traders who value liquidity above all else and are looking for a quick way to gain exposure to the commodity markets.

Disclosure: No positions at time of writing.

This entry was posted in Commodity ETF Analysis, Commodity ETFs, Investment Vehicles, Spotlight and tagged . Bookmark the permalink.

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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