ETF Analysis - PowerShares DB Commodity Tracking ETF (DBC)

TLDR

1. Raw material prices can rise in mid to long-term.

2. When investing, be cautious with hidden market risk, but other risks are very limited.

3. It is good when you want raw material assets. (Think of appointing a personal commodity manager at 0.85% per year)

Summary

 

The Fund is one of the PowerShare ETFs and trades as an ETF(Exchange Traded Fund) that follows the raw material price trends in as raw futures (Futures) and US Treasuries listed on the Exchange. The AUM (Asset Under Management) is about $ 3 billion and the average daily trading volume is about $ 40 million. Management fees are 0.85% per annum. Dividends have not been paid after 2008.

The period between 2009 and 2010, shortly after the end of the raw material super cycle in the 2000s, and 2015-2017, was the worst years for raw materials. In particular, in 2016, price dived to a new low and the market was crashed. However, since mid-2017, international oil prices have been rising and due to its effect, other commodities prices are rising at the same time. Except for a few metals, most are rising together.

In the above picture, we can see the raw material market history since the financial crisis, and now it has been rising. We still have to watch the trends to say it is rising; however, the recent uptrend is quite impressive.

The Fund is a fund that follows the price of raw materials as its name suggests. The Fund maintains a long position (buying position) of raw material-related funds such as crude oil, kerosene, gasoline, gas, gold, silver, copper, corn, wheat, soybeans and so on. Major assets are listed below. Even though the Fund invests in all kinds of raw materials, the oil is the highest in the shares.

(Table from https://www.invesco.com)

The management fee is not low and is 0.86%. In fact, it is a fund of high-maintenance since the futures have to rollover continuously. The performance of the Fund is shown in the chart below.

(Chart taken from http://www.morningstar.com)

The operation focuses on mid-to-long-term futures, which is actually the easiest. You cannot buy all the raw materials in spot and put them in a warehouse. Besides, it's a waste if you just keep the raw materials and not use them. And for few other reasons, common commodity funds are all futures.

In the case of contango, purchase nearby month contract, and in the case of back-wardation, a return can be maximized by purchasing distant month contract. However, it is most likely to be a negative carry (a situation where you will lose a little money over time).

Risks

1. Liquidity risk

Asset Under Management (AUM) is about $ 3 billion (about 3 trillion won) and daily trading volume is around $ 40 million (about 40 billion won). Therefore, there are not much of a liquidity risks. Since the funds are made up of US Treasuries and commodity futures, liquidity is relatively abundant. 

2. Credit Risk

Since most of the transactions are made in the futures market, there are almost no risks related to the credit risk. As cash is also managed with US Treasury bonds, there is no real credit risk.

3. Market Risk

Market risk is great. Although dispersed, it is exposed to all commodity markets. Since raw materials generally move in the same direction, it is reasonable to assume that these funds have a very little dispersion effect other than short-term noise filtering. Of course it is better than putting every bit of money into one thing. The annual volatility (standard deviation) fluctuates between 14 and 19%. It is not so different than stocks.

Next, it's a fairly important risk, if you rollover futures (replacing an expiring futures with the next or the next next), you may lose or make profit. If the spot and the futures are backwards (spot price> futures price), they will have additional profit over time, but for contango (futures price> spot price), the loss will continue over time. In general, the futures market is more likely to be contango, so the fund must also take some negative carry. This means that as the price of raw materials rises, the price of the fund may not rise. And if the price of raw materials falls, the price of the fund may fall further.

Finally, when investing in non-dollar funds, there is a risk of foreign exchange. Since most commodity futures are denominated in US dollars, it may be necessary to hedge against a weak dollar.

4. Political Risk

Each raw material is influenced by the political situation of the main producing countries. However, it can be considered that the raw materials are more affected by the raw material cycle than the political risk because the main production area of ​​each raw material is dispersed. Individual political risks are not much of a problem. It is influenced by the political events of China, the world's largest importer of raw materials, but it is also much more limited for individual raw materials.

Conclusion

How do you hedge inflation? It is a good idea to incorporate some of the assets into the commodity. But there are too many kinds of raw materials. And we cannot purchase them and put them in a warehouse (unless you run a huge factory or something), so they should be kept as futures. This sounds so easy but you have to rollover every month, and it takes a lot of trouble to settle the margin every day. It is better to leave it to another person at just 85bp for management. We cannot manage all that raw materials. It seems like a good idea to add asset classes for raw materials with the funds.

Raw material investment has many leverage products, but in general, the price of raw materials is very volatile, therefore, the market itself has enough profitability (or loss) without leverage. Therefore, a fund that does not cause leverage like the fund seems comfortable.

Closing

In addition to this fund, there are other raw material sector funds such as DBA (agricultural products), DBB (nonferrous metal), DBP (precious metals), DBE (energy) and so on in case you are interested. But I think it is better to keep the raw material market only as assets.