Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

DBC In Depth: The Five Minute Guide To The DB Commodity Index Tracking Fund

DBC In Depth: The Five Minute Guide To The DB Commodity Index Tracking FundThe proliferation of the exchange-traded product structure has opened up previously difficult-to-reach corners of the market to mainstream investors. Commodities in particular have seen a tremendous rise in popularity as ETPs have made it easy, andcost-effective, for investors to tap into this asset class which has demonstrated the potential to deliver valuable diversification and return-enhancement benefits. Most investors are familiar with only the largest and most popular of these products, but those willing to dig a bit deeper will uncover some very intriguing investment opportunities [for more commodity ETF news and analysis subscribe to ourfree newsletter].

Below we profile the PowerShares DB Com Indx Trckng Fund (NYSEARCA:DBC), one of the oldest and most popular broad-based commodity ETPs on the market.

Vital Stats

Here’s a quick overview of the basics of DBC:

  • Issuer: PowerShares
  • Index: DBIQ Optimum Yield Diversified Commodity Index Excess Return
  • Number of Commodities: 14
  • Largest Allocation: RBOB Gasoline (13.26%)
  • Inception Date: February 3, 2006
  • Expense Ratio: 0.75%
  • Assets: $6.1 billion (as of 10/17/2012)
  • Structure: Commodity Pool / Partnership

Under The Hood

DBC seeks to replicate the DBIQ Optimum Yield Diversified Commodity Index Excess Return, a benchmark comprised of 14 different commodity futures contracts. The index and base weights for the component futures contracts are presented in the following table (as of 10/16/2012) :

Commodity Contract Expiry Date Index Weight Base Weight
Aluminium 10/16/2013 3.63% 4.17%
Brent Crude 11/15/2012 13.03% 12.38%
Copper – Grade A 3/20/2013 4.30% 4.17%
Corn 12/14/2012 6.73% 5.63%
Gold 12/27/2012 7.66% 8.00%
Heating Oil 3/29/2013 12.53% 12.38%
Light Crude 6/20/2013 11.82% 12.38%
Natural Gas 9/26/2013 4.33% 5.50%
RBOB Gasoline 11/30/2012 13.26% 12.38%
Silver 12/27/2012 1.86% 2.00%
Soybeans 11/14/2013 7.06% 5.63%
Sugar #11 6/28/2013 4.24% 5.63%
Wheat 7/12/2013 5.73% 5.63%
Zinc 12/19/2012 3.81% 4.17%

DBC is well-diversified in the sense that it features exposure to all major segments of the commodity market; this ETP covers energyprecious metalsagriculture, and industrial metals. From a balance perspective however, DBC’s portfolio is quite lacking. This underlying portfolio is very heavily tilted towards the energy family as the various fossil fuel contracts account for half of total assets, increasing the sector-specific risk associated with this product. Furthermore, investors should also note that DBC does not include allocations to livestock (i.e. cattle and hogs) commodities.

Noteworthy Features

There are several noteworthy features of DBC, beginning with the structure of this product. DBC sets itself apart from competitors in the space because it is structured as a partnership that invests in futures contracts. As such, the IRS requires that this fund is marked to market at the end of each calendar year, at which point investors are apportioned a pro rata share of gains or losses. In other words, taxes will be incurred on positions in DBC annually, regardless of whether or not shares in the ETF were actually sold during the year. For long-term, buy-and-hold investors that feature may be less than optimal, since a period of strong gains may result in a significant tax liability. Because of its product structure, investors should also note that shareholders of DBC will be required to complete a Form K-1 annually, which further increases the administrative burden associated with this product [see also The Ten Commandments Of Commodity Investing].

Aside from the various nuances discussed above, DBC features several advantages in addition to offering easy, cost-efficient access to a diverse basket of commodities. When it comes to liquidity, this ETP takes home the cake without breaking a sweat; with over $6 billion in assets under management and average daily trading volumes easily topping 2 million shares, it’s no secret that DBC is a favorite among investors and active traders alike. This ETP also boasts an extremely active options market, allowing for seasoned investors to implement a variety of advanced trading and hedging strategies. Lastly, DBC is available for commission free trading to TD Ameritrade and Firstrade account holders.

How To Use

DBC is perhaps most appealing to active traders who value liquidity above all else and are looking for a quick way to gain exposure to the commodity markets. Because of the various tax and administrative burdens associated with this fund, DBC is likely less than ideal for those interested in achieving exposure to the commodity asset class over the long-haul. Furthermore, the fund’s energy-heavy portfolio will likely deter those who prefer a more balanced approach when accessing this market [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].

This article was originally written by Stoyan Bojinov, and posted on CommodityHQ.

Loading Comments...