ETF Prime Archive

New Commodity Equity ETF

Jefferies, the publisher of the popular Reuters-Jefferies CRB Index, recently launched the Jefferies | TR/J CRB Global Commodity Equity Index Fund (CRBQ) which invests in the stocks of companies primarily involved in the production and distribution of commodities and related products and services.

This new ETF will seek to track the performance of the Thomson Reuters/Jefferies In-The-Ground CRB Global Commodity Equity Index, which is essentially intended to be an equity version of the benchmark CRB Index.  The fund’s 147 holdings are comprised of agriculture (38%), industrial metals (14%), precious metals (9%), and energy (39%) and its top three holdings are Monsanto, Exxon, and Potash.

This is an interesting new entrant into the commodity ETF space given the current regulatory microscope futures-based commodity ETFs are under.  By investing in the equities of companies involved in the production and distribution of commodities – and not using futures contracts – operation of the fund will not be affected by potential regulations concerning position limits that futures-based commodity ETFs are currently dealing with.

In addition, the ETF avoids the complexities involved with futures-based commodity ETFs such as contango and backwardation.  These conditions reflect higher or lower forward month prices relative to spot prices.  This can either decrease or increase returns of the ETF since the fund might have to purchase forward futures contracts at a premium or discount to the spot price.  In addition, investors won’t have to file a schedule K-1 with their annual tax returns, a small nuisance that investors must deal with on futures-based commodity ETFs which are structured as limited partnerships.

Finally, another potential benefit – one that is often overlooked when investing in futures-based commodity ETFs – is the ability to capture dividends.  Since the fund is investing in companies, and not contracts, investors can reap the rewards of any dividends paid by those companies.

While this equity ETF does not encounter some of the issues involved with futures-based commodity ETFs , it’s important to note that the equities of commodity producers and distributors can behave differently than the commodities themselves.  If the stock market is dropping precipitously, it’s highly likely that the stocks of commodity producers will drop as well, even if the actual commodities are performing differently.  For example, during the most recent market collapse, DBA, which invests in agriculture-related futures contracts and swaps was down approximately 49% (from its high to low), while it’s equities-based counterpart, MOO, was down a whopping 70%.  In other words, investors looking for agriculture exposure via equities suffered an additional 21% loss than had they made the more pure play.

Also, because this ETF holds global equities and thus, has holdings denominated in currencies other than the dollar, currency fluctuations can be either supportive or detrimental to the overall performance of the fund – a dynamic that doesn’t concern fully dollar-denominated futures-based commodity ETFs.

Why Green ETFs May Be Worth A Look

As the world begins to recover from a global recession, political attention is starting to shift to other areas.  One such area is clean energy, making green exchange traded funds an interesting place to look.

One reason that green ETFs may be attractive in the near future is the portion of the U.S. energy policy which calls for a reduction of 30%-40% in emmissions over the next few years.  In fact, the American Clean Energy and Security Act aims to cut emissions from 2005 levels by 17% in 2020 and 83% by 2050.

A second reason that green ETFs might be attractive is that clean energy is becoming cheaper, more efficient and more competitively viable.  Take the solar industry, for example, where innovation and technology is enabling the development of a new thin-film panel technology that will soon replace the limited capacity produced from polysilicon panels, pushing efficiency of solar panels up near the 20% mark.

Not surprisingly, green ETFs and alternative energy ETFs have been highly correlated to energy prices over the past couple of years.  As the price of oil goes up, alternative fuels and clean energy become more compettive as substitutes.  The collapse of energy prices during the last half of 2008, likewise, saw corresponding declines in alternative energy and clean energy equities.

This doesn’t mean that green ETFs don’t come with disadvantages.  Green ETFs generally lack diversity, lack the liquidity of larger ETFs and can be subject to big price swings.  Additionally, as emerging nations continue to grow and prosper, they will continue to demand emergy, most likely coal and crude oil, to fuel their factories and businesses which could further put a damper on green ETFs.

From an investor’s perspective, one can grab exposure to clean energy through the following ETFs:  the Claymore Global Solar Energy ETF (TAN), which will give exposure to the solar subsector of the industry, the Market Vectors Global Alternative Energy  (GEX) which gives one global exposure to green energy, First Trust’s Global Wind Energy (FAN) or the PowerShares WilderHill Progressive Energy (PUW) which gives a broader, more diverse exposure to green energy.

How to Access Gold With ETFs and ETNs

During periods of extreme inflation or deflation, gold has proven itself to be an investment alternative worth looking at and, recently, gold has started to outperform once again.

Whether it be fear that the U.S. government is printing too many dollars or that investors just want to add protection to their portfolios, it is important to understand the various choices one has in gold exchange traded products.

First, there are the ETFs which physically hold gold bullion.  These ETFs are taxed as collectibles at a long-term capital gains rate of 28%.  ETFs that hold physical gold are the SPDR Gold Shares (GLD, $32 billion in assets), the iShares COMEX Gold Trust (IAU, $2.5 billion in assets) and, the newcomer, ETFS Physical Swiss Gold Shares (SGOL, $129 million).  Were GLD a country’s central bank, it would rank sixth in the world, recently surpassing Switzerland, in its gold holdings.  Some may find IAU more attractive than GLD due to its smaller and less conspicuous (although not “small”) market footprint, whereas SGOL provides diversification regarding the country in which the metal is warehoused.

Secondly, there are ETFs which hold futures contracts in gold.  These include PowerShares’ DB Gold (DGL), Ultra Gold ProShares (UGL) and UltraShort Gold ProShares (GLL).  All three are organized as partnerships and are taxed as futures, that is 60% as long-term capital gains and 40% as short-term capital gains.  DGL is unique in that it aims to minimize losses from contango and maximize gains from backwardation by placing its holdings in one of any 13 months (front month plus 12) rather than maintained in front-month futures only, as are  UGL and GLL.  DGL is an unleveraged play, whereas UGL and GLL are both levered ETFs aiming to deliver twice the daily change in gold prices.

Thirdly, gold can be accessed through exchange traded notes, ETNs, which are debt instruments that track an index.  From a tax perspective, they are currently subject to the 15% long-term capital gains rate with holding periods of longer than one year.  These ETNs enable investors to short the gold market or grab leveraged exposure to it.  Here are four gold-related ETNs:

•  PowerShares DB Gold Double Short ETN (DZZ)
•  PowerShares DB Gold Double Long ETN (DGP)
•  PowerShares DB Gold Short ETN (DGZ)
•  E-TRACS UBS Bloomberg CMCI Gold ETN (UBG)

Lastly, one can gain exposure to gold through gold mining stocks, via the Market Vectors Gold Miners ETF (GDX).  GDX currently holds 31 different gold mining stocks, offering company diversity, and carries an expense ratio of 0.55%; it is taxed using the traditional short-term and long-term capital gains rates.

There are wide-ranging choices when it comes to investing in gold, but keep in mind tax treatments and risk appetite when choosing which ETFs or ETNs are right for you.

New Mega-Cap ETFs

Three new iShares “Mega-Cap” ETFs made their debut last Friday – the iShares Russell Top 200 Index Fund (IWL), the iShares Russell Top 200 Growth Fund (IWY), and the iShares Russell Top 200 Value Index Fund (IWX).  All three funds seek to provide equity exposure to the largest of the large cap companies.

According to iShares, the Russell Top 200 Index “is a subset of the Russell 1000 Index and includes approximately 200 of the largest securities based on a combination of their market cap and current index membership, comprising approximately 65% of the US market”.  The Russell 1000 Index represents approximately 1,000 of the largest securities and comprises nearly 90% of total US market capitalization.

The Russell Top 200 Growth Index tracks the largest 200 companies in the Russell 1000 exhibiting traditional growth characteristics such as higher projected future earnings growth and higher price-to-book ratios while the Russell Top 200 Value Index tracks the largest 200 companies in the Russell 1000 with lower projected future earnings growth and lower price-to-book ratios.

The new Mega-Cap ETFs provide investors with an easy way to gain targeted exposure to the largest companies in the equity universe, enabling investors to more easily overweight these stocks.  Mega-Cap stocks are typically the largest, most stable companies and thus, investors may want to overweight them in times of market turmoil as a “safer” play than smaller, more volatile stocks.

Threat of Regulations Doesn’t Keep Commodity ETFs Down

In a time of uncertainty and hurdles for leveraged ETFs, the creator of the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG), the United States Commodity Funds LLC, has launched the newest member of its family, the United States Short Oil Fund (DNO).

This new fund is an inverse exchange traded fund which is designed to track the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the price changes of a designated benchmark futures contract on light, sweet crude oil traded on the New York Mercantile Exchange. 

The introduction of DNO comes at a time when the CFTC has been scrutinizing commodity ETFs.  Although the regulations have still not been imposed, many have felt threatened by the anticipation of the new restrictions, which have even forced some, like the PowerShares DB Crude Oil Double Long ETN (DXO) to shut down, knowing that the fund’s size would make it particularly vulnerable to position limits.

DNO will most likely face the same issues and problems that other commodity ETFs have; however, on the positive side, creation limitations may take awhile to kick in, but when they do, there is a good chance that this fund could be curtailed if it proves to be popular.