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 (DJCI), a product from UBS that offers broad-based exposure to a basket 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.
Disclosure: No positions at time of writing.
[...] DJP can be used in a number of ways, including as a core holding in buy-and-hold portfolios for investors looking to establish cheap, low maintenance exposure to commodities over the long-haul. Although this ETN features excellent balance and diversity amongst its holdings, it’s not without its flaws; DJP is linked to the same index as DJCI, both are ETN’s, except DJCI charges 0.25% less in expense fees. All in all, it’s difficult to justify owning this product when there is a cheaper option available with the same structure and same underlying index [see DJCI Spotlight]. [...]