Another new week of trading kicking off and it's all quiet before the storm. Not necessarily a bad storm, but with so many big tech companies reporting their earnings this week and next, we're probably in for some volatility. Again, not necessarily the type of volatility that sends stocks lower, because volatility is something that often happens in both directions.
Regardless, it's a big week for a lot of stocks as some make new highs while many continue to struggle keeping up with the big boys out there. The big no doubt continue to get bigger, while the smaller names out there continue to work diligently to make some hay for dedicated investors looking for much bigger gains than what we usually see in those bigger conglomerates.
Gold continues its sharp rally after a miserable June - one that started to really make gold bugs wonder what was going on there - but sure enough, the precious metal fundamentalist came back in and put a bid under gold as an instrument that could end up being a pretty safe haven once the equity markets have finally had enough.
Remember, if you're willing to exercise some patience commodities isn't a bad place to be, because when you look at some of the bigger commodity ETF's out there, it becomes quite apparent commodities haven't gotten the kind of love they once saw. However, we all know that can change in the grand scheme of market cycles.
There's a few big ETF's out there one can consider if you're in agreement with the whole reflationary theme.
The PowerShares DB Commodity Index Tracking Fund (DBC) tracks an index of 14 commodities. It uses futures contracts to maintain exposure and selects them based on the shape of the futures curve to minimize contango. Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity.
DBC thoughtfully addresses the two thorniest problems in commodities: weighting and roll costs. The most market-like approach, production weighting, allocates heavily to consumables like oil at the expense of storables like gold. DBC threads the needle by capping energy's economic dominance at 60%, yet allowing for a diversified portfolio. DBC aims to turn short-term contracts into a long-term investment carefully, by picking the cheapest of the tenors available for each of its contracts. This mitigates roll costs, but in cases where DBC selects long-term contracts, it can sacrifice responsiveness to short-term price movements.
The PowerShares DB Agriculture Fund (DBA) tracks an index of 10 agricultural commodity futures contracts. It selects contracts based on the shape of the futures curve to minimize contango.
DBA broadens its holdings to include livestock in its universe in exchange for under-weighting heavily produced commodities like corn and wheat, and chooses the contracts it holds based on the shape of the futures curve (in order to dampen contango effects). Investors will therefore get less sensitivity to short-term spot movements, as well as exposure to different risk factors. Still, it's an easy fund to trade, with high daily volumes and extremely low spreads for the segment.
For investors who don't really have the time to buy futures or spend the time researching, once commodities have finally bottomed DBA and DBC are two ETF's to strongly consider if you're looking for vast exposure to the entire commodity space.
You can see in those chart above 2016 wasn't a bad year for DBC - compared to this year anyway. But, when you consider this year so far has really been nothing more than a long-term breather, maybe it's starting to bottom now.
DBA, on the other hand, just keeps testing its bottom over and over again. However, if the recent support can hold, maybe there's some nice money to be mad in DBA going forward from here.
One thing's for darn sure, I'd rather own them now than at any point in recent years, because no matter what, it's not like the demand for commodities on a long-term basis is going anywhere.
We are clearly a world of resource consumption, so to think the price of commodities aren't going to find new highs at some point down the road would be a real stretch.