Please ensure Javascript is enabled for purposes of website accessibility

Commodities ETFs: Dead on Arrival?

By Dan Caplinger – Updated Apr 5, 2017 at 8:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are the latest bets on commodities too late?

Until last month, commodities stood out as a rare bright spot in an otherwise gloomy market environment. But while prices of several commodities have come crashing down to earth since July, ETF managers are still releasing new funds that let investors bet on a continued bull run in hard assets.

On Wednesday, Invesco PowerShares announced that it would issue four new commodities-related ETFs next month. The funds will focus on global participants in the agriculture, coal, precious metals, and steel sectors.

A crowded universe
To those who've followed ETF offerings in recent years, funds that track commodities are nothing new. PowerShares' own Commodity Index Tracking Fund (DBC), for instance, holds futures contracts in six different commodities factored into the index it tracks, including gold, oil, and corn. Since its inception in 2006, this fund has gathered more than $2.3 billion in assets. A similar iShares offering tracks the well-known Goldman Sachs Commodity Index.

Yet investors don't have to buy commodities directly to profit from their rise. Rather than investing in futures contracts, these new PowerShares funds use a more traditional approach: They buy shares of companies that produce those commodities.

Will history repeat itself?
In doing so, PowerShares is going head-to-head with rival ETF manager Van Eck. The latter company's Market Vectors ETFs were the first movers in the industry, and they've had plenty of success gaining popularity and assets. By giving its new ETFs a global name, PowerShares is trying to distinguish its offerings from Van Eck's. Yet the new ETFs will hold a number of U.S. stocks also found among the Van Eck funds' holdings.

For instance, the Market Vectors Steel ETF (SLX) rose 84% last year, and it was up sharply earlier this year. Many of the companies it holds, including U.S. Steel (NYSE:X) and ArcelorMittal (NYSE:MT) are also included in the index the new PowerShares fund will track.

Similarly, the success of coal companies like CONSOL Energy (NYSE:CNX), Peabody Energy (NYSE:BTU), and Arch Coal (NYSE:ACI) has boosted total assets under management at the Market Vectors Coal ETF (KOL) beyond the $300 million mark since its inception in January. And with $1.6 billion in assets after a single year of operation, the Market Vectors Agribusiness ETF (MOO) has seen its fortunes rise with those of PotashCorp (NYSE:POT), Monsanto (NYSE:MON), and other high-flying ag companies -- many of which you'll also find in the new PowerShares offering.

Timing is everything
It's interesting that PowerShares decided to proceed with its commodities-ETF launch despite a huge pullback in commodities stocks. The performance of the comparable Market Vectors funds over the past couple of months tells you just how much carnage these sectors have seen:

Market Vectors Fund

Return Since 6/30/2008

Agribusiness

(17.8%)

Coal

(21.2%)

Gold Miners (GDX)

(22%)

Steel

(23.6%)

Source: Yahoo! Finance.

Given the negative price pressure, it's clear that PowerShares is betting on a big rebound -- or at least, on finding investors willing to bet that the past several years' gains in commodities weren't just a fluke.

If the recent pullback proves only temporary, PowerShares will have a better chance at catching up to Van Eck. Given how many ETF investors focus on short-term performance, the pullback will hurt Van Eck's year-to-date and one-year performance numbers, even as the PowerShares ETFs build a track record.

On the other hand, if commodities keep sinking, the PowerShares offerings may well find themselves in the graveyard of dissolved ETFs, such as Claymore's Sudan Free and Global Vaccine funds. PowerShares must hope that regardless of past performance, investors will recognize commodities as a separate asset class worthy of inclusion in a diversified asset allocation plan -- and that those investors will use the new PowerShares ETFs to gain exposure to stocks that will benefit from higher commodities prices.

Further Foolishness is a hot commodity:

If you're looking for the best mutual funds and ETFs for your portfolio, look no further than our Motley Fool Champion Funds newsletter. Fool fund expert Amanda Kish sifts through thousands of funds to find the best of the bunch. Try it out today with a 30-day trial, absolutely free.

Fool contributor Dan Caplinger thinks commodities will rise again, though perhaps not to their former glory. He doesn't own shares of the funds and stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is worth its weight in gold.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peabody Energy Corporation Stock Quote
Peabody Energy Corporation
BTU
CONSOL Energy Inc. Stock Quote
CONSOL Energy Inc.
CNX
$14.78 (-6.75%) $-1.07
United States Steel Corporation Stock Quote
United States Steel Corporation
X
$18.59 (-5.54%) $-1.09
Nutrien Stock Quote
Nutrien
POT
ArcelorMittal Stock Quote
ArcelorMittal
MT
$20.33 (-4.60%) $0.98
Monsanto Company Stock Quote
Monsanto Company
MON

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.