Five Commodity ETFs Long Term Investors Should Run Away From

Commodity ETF investing has rapidly grown in popularity in recent years, as these securities have democratized an asset class that was once out of reach for a vast number of investors. Now, you can add exposure to physical gold or soybean futures with a single ticker. The majority of these products were designed with traders in mind, but there are also a fair amount of commodity funds that were designed for long-term investors. The problem is, it can be difficult to tell which funds are appropriate for you and your investment strategy. Below, we outline five commodity ETFs that can be useful in certain environments, but should be avoided by long-term investors [for more commodity ETF news subscribe to our free newsletter].

SPDR Gold Trust (GLD)

  • AUM: $74 billion
  • Expense Ratio: 0.40%
  • YTD Return: 12.1%
  • Inception Date: 11/18/2004

Before you scroll down to the comment section to voice your vehement opposition to this fund making an appearance, consider the fact that there is a better option for long-term gold exposure. The COMEX Gold Trust (IAU) offers physically backed gold that is 100% allocated, meaning that there is never a discrepancy between the trust and custodian of the fund, whereas this is possible in GLD. But the smoking gun here comes from expenses; IAU charges 15 basis points less than GLD, making it rather baffling that anyone would hold GLD long-term when there is a better, cheaper option. That being said, GLD is one of the most important trading and speculative tools in the ETF world and on its own it is a good long-term hold, But IAU’s inception in 2005 marked a competition that GLD simply cannot shake off.

United States Natural Gas Fund (UNG)

  • AUM: $1.1 billion
  • Expense Ratio: 0.60%
  • YTD Return: -24.7%
  • Inception Date: 04/18/2007

If we had a nickel for every time a person complained about getting burned by UNG, our day jobs would become pocket change. UNG falls prey to contango, is subjected to tracking error, and has also been one of the worst performing ETFs of all time. It should never appear in a long term portfolio as it was simply not designed with that kind of action in mind. Instead, UNG should be used as a trading instrument for short-term plays on natural gas. This is a task that the fund is second to none at accomplishing, trading more than 10 million times each day with an active options market [see also 25 Ways To Invest In Natural Gas].

United States Oil Fund (USO)

  • AUM: $1.4 billion
  • Expense Ratio: 0.45%
  • YTD Return: -6.2%
  • Inception Date: 04/10/2006

Pretty much the same story here. USO was designed and effectively runs as a trading tool for those who have the ability to constantly monitor their positions. Tracking front-month WTI futures means this product will also get slaughtered by contango making it a less-than-ideal allocation over the long-term. USO is up 4.5% in the trailing year while crude is up nearly 17% by comparison, and the performance delta exists on most return timelines.

DB Commodity Index Tracking Fund (DBC)

  • AUM: $6.2 billion
  • Expense Ratio: 0.75%
  • YTD Return: 7.7%
  • Inception Date: 02/03/2006

DBC advertises itself as a broad commodities product that invests in the 14 most heavily traded contracts in the world. While it does exactly what it says, many investors fail to look under the hood at the allocations the fund actually makes. The top five allocations go to WTI, Brent crude, heating oil, RBOB, and natural gas, giving and energy exposure of 55%. While there is nothing fundamentally wrong with DBC, chances are most investors are looking for a more well-rounded commodity product that doesn’t leave them so vulnerable to the heavily volatility that the energy world offers [see also The Ten Commandments of Commodity Investing].

Leveraged Funds

For every success story that you can send find about leveraged commodity funds, you will find five failures that ravaged a portfolio. Yes, there are those individuals lucky enough to get into one of these funds at the right time and turn quite a profit, but the truth is that roughly 90% of all commodity investors lose money and those losses are only magnified by a leveraged product. Funds like AQG, UGAZ, and UGLD have had their runs, but they have also chalked up some abysmal losses. Over the long-term the volatility of the commodity world almost always works its way in. These funds are fantastic for traders looking to lever up their holdings, but in the long-term leveraged commodity funds are bad news.

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Disclosure: No positions at time of writing.

This entry was posted in Actionable Ideas, Asset Allocation, Commodity ETFs, Commodity Futures, Energy, Gold, Natural Gas, Precious Metals, WTI 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.

4 Responses to “Five Commodity ETFs Long Term Investors Should Run Away From”

  1. [...] it seems that bullishness is slowly working its way back into this once-flailing commodity, as NG is on the cusp of turning positive for the year. It should also be noted that NG demand also [...]

  2. [...] It is widely agreed that natural gas will play an increasing role in our energy usage in the coming years. Though the fossil fuel suffered a blow following the 2008 recession, recent weeks have seen the commodity claw its way higher. But investors should keep in mind that as NG becomes more expensive, alternatives are bound to step in. Many experts and analysts feel that NG’s popularity is mainly due to the fact that it became so cheap, but as it begins to get more expensive, many are looking to sources like coal to make a resurgence [see also Five Commodity ETFs Long Term Investors Should Run Away From]. [...]

  3. [...] crops like azuki beans and oats. This diverse spread makes RJA an attractive buy for the long-term, as the fund is less dependent on the performance of just a few contracts which makes it a less [...]

  4. [...] The fee structure of these two products is another important factor that investors will need to take a close look at. CROP comes at a price of 75 basis points, not terribly expensive given the small cap nature of its exposure. MOO, however, charges just 59 basis points in comparison; while this certainly makes it the cheaper option, it is still relatively expensive for a large cap product. Unless you are a heavy hitter, the 16 point spread won’t impact you too much; a $10,000 investment would net to about a $16 annual fee difference in the two funds. But for those looking to make big bets, MOO’s cheaper expenses may save you a fair amount of money over the long term [see also Five Commodity ETFs Long Term Investors Should Run Away From]. [...]

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