New Commodity ETF Arrives At Optimal Time
ETFs that track both narrow-focused and broad-based commodity indices have fallen significantly in value this year despite the soaring stock market. A glut of supply, currency headwinds and overall lackluster demand has exerted a global deflationary environment to these liquid futures markets.
In addition, many ETFs that own a specific basket of underlying commodity pools are plagued by the tax consequences of their legal structure that generates a K-1 for shareholders. This added burden can be a headache at tax time for investors that are unaware of the tax ramifications to owning a fund that is structured as a limited partnership rather than a trust.
To combat these pernicious tax effects and capitalize on depressed commodity prices, PowerShares launched a new fund aimed to track a diversified basket of raw goods. The PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (NASDAQ: PDBC) is based on an index created by Deutsche Bank that tracks 14 separate commodities.
PDBC currently has a 58-percent weight in energy, 18 percent agriculture, 14 percent industrial metals and 10 percent precious metals. The out-sized position in energy is spread among crude oil, natural gas, heating oil and gasoline.
One of the primary benefits of this ETF versus a well-known competitor such as the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) is that shareholders receive a 1099 rather than a K-1. This is because PDBC is structured as a registered investment company under the Investment Company Act of 1940.
Investing in commodities can offer an additional diversification element to your portfolio outside traditional asset classes such as stocks and bonds because of their non-correlated returns. Commodity-linked funds often show favorable price trends in a rising interest rate or inflationary environment as well.
PDBC charges an expense ratio of 0.59 percent and trades on the NASDAQ exchange effective immediately. This new ETF will certainly be an opportunity to consider when commodity prices once again regain their footing.
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