Just this week, several new ETFs were introduced that enhance the ability of investors to join in the commodities game. While many of them including the oil, gold, and silver ETF (DBO, DBS, DGL) are improvements on previous funds, the DBA fund is the first that allows investors to get involved in the agricultural commodities – perhaps the best value left in the natural resources arena.
The DBA fund is an ETF that uses its capital to purchase contracts for sugar, soybeans, corn, and wheat. Each commodity comprises 25% of the index. In addition, because of the large amount of leverage involved in purchasing futures contracts, the fund is able to invest the majority of its money at the same time in Treasury Bills, thus earning an extra few percentage points each year on top being exposed to the agricultural commodities.
With the recent announcement by the USDA that corn harvesting is going to be 20% below expectations in the United States, corn contracts on Friday exploded, reaching their daily price gain limit, and sending DBA up 7% for the day. With ethanol demand on the rise, the potential gains for corn over the next few years are huge. This could also impact that future of soybeans, as many farmers in the United States choose each year between planting corn or soybean plants. With corn prices gaining, it just a matter of time before fewer and fewer soybean plantings send prices for them skyrocketing as well. Sugar and Wheat, which have both had good runs , are also facing economic tailwinds which could positively impact their prices. And with little other alternatives for many mainstream investors, the DBA fund looks poised to be one of the better plays in 2007.
The other funds introduced by Powershares last week, also use the Treasury Bill collateralization technique to improve their performance by a few points each year. This type of intelligent thought process is improving the ability of investors to be exposed to commodities, and improving their rate of return. In comparison to the already existing funds such as GLD and USO, the new ETFs introduced by Powershares (DBA, DBB, DBE, DBO, DBP, DBS, DGL), are essentially the new and improved Commodity ETFs.
The Commodity Investor