Wikinvest Wire

Metals ETFs and ETNs in 2009

Wednesday, January 27, 2010

Even with the month of January now almost over, it's still not too late to look at how another group of commodity ETFs and ETNs did in the year that just concluded - metals.

Earlier this month, the performance of Energy ETFs and ETNs in 2009 was examined and it was quickly learned that, while it was a good year for both investors in these commodities and the underlying commodities themselves, the returns on the former fell far short of the gains for the latter.

In one of the more extreme examples of this phenomenon, while the price of crude oil rose some 78 percent last year, the popular United States Oil Fund (NYSEArca:USO) finished with a gain of just 19 percent, no doubt leaving a large number of folks with money invested in this sector wondering what all the fuss over rising oil prices was all about.

The results were even worse for natural gas where investors suffered huge losses even though natural gas futures ended the year about where they began.

As it turns out, the wicked contango that crimped investment returns in energy commodities last year was all but absent for the entire metals group and investors who were able to set aside worries about a "gold bubble" and ignore reports about Chinese pig farmers storing large quantities of copper wire out back (and borrowing money against those rolls of wire to purchase even more) saw great returns.

After a tumultuous few years for every metal except for gold - the metal whose price rose steadily through the entire previous decade, much to the consternation of the editors at Money Magazine - prices for both precious metals and base metals ended 2009 far higher than where they began as shown below.
IMAGE And, last year, the good news for investors in the 25 related ETFs/ETNs (by my count) for which full-year data was available is that they saw about the same gains as in the metals themselves, in some cases even more.

Before getting to the metal ETF/ETN returns, it's worth looking closely at the last four years of data in the table above to see what, if anything, can be gleaned from it.

The first observation that can be made is that gold was the only metal to post gains in all four years - even in 2008 when nearly everything else plunged. Also, some of those impressive gains for base metals last year all of a sudden don't look quite so good when you look at the large red numbers to their left.

For example, the 150 percent gain for lead in 2009 after a loss of 62 percent the year before doesn't even get you back to even for those two years. As it turns out, lead's gains in prior years help to put it in the top spot over the four year period shown, but not by much.

Lead's total four-year gain of 229 percent is just slightly above that of gold at 211 percent, a fact that is not intuitively obvious when looking at the chart above as most people fail to realize just how severe losses of 40, 50, or 60 percent really are. Rounding out the top five metals over the last four years, zinc was up 196 percent, silver gained 189 percent, and copper rose 163 percent with platinum, palladium, aluminum and nickel all more than doubling.

As for investors, unless you have a futures trading account you can't possibly have a four year history for any of these metals except for gold and silver since all but the first three funds in the table below were launched in 2007 or later, but, with the obvious exception of the inverse funds, you could have seen big gains with any of these last year.
IMAGE There are just a few points to be made about the data above, the most important of which is that all of these offerings tracked the underlying commodity fairly well, most to within just a percentage point or two and even the leveraged and inverse funds were pretty close.

Of course, the "granddaddy of them all" - the world's second largest ETF of any kind in the SPDR Gold Shares ETF (NYSEArca:GLD) - just continues to get larger and larger, now valued at around $40 billion. Since the inventory of gold bars there has been fairly steady for months, the value of the ETF just goes up and down with the gold price which, lately, has been going down.

At about $5 billion, the iShares Silver Trust (NYSEArca:SLV) is the second largest commodity fund available to retail investors. Institutional investors have access to much larger broad commodity funds such as the $11 billion PIMCO Commodity Real Return Strategy Institutional (PCRIX) which also provides a variety of share classes for retail investors.

As might be expected, trading volume has been highest in the large gold and silver ETFs, but, beyond those two, the PowerShares DB Gold Double Long ETN (DGP) seems to have attracted a good deal of interest. For all the bad news about leveraged funds last year, this one did quite well, up 46.2 percent, just below the expected 48 percent 2x gain for the metal.

The PowerShares DB Base Metals Double Long ETN (BDD) was the performance leader by a wide margin in 2009, up a whopping 228 percent, with copper and lead ETNs posting triple-digit gains.

Amid all the contango-related problems that have persisted for over a year now with broad commodity funds, energy ETFs, and agricultural funds, it's nice to see that in at least this one sector, investors get what they think they're going to get.

While the results for base metals were quite good last year, it remains to be seen whether this table will be full of '+' signs or '-' signs when it is updated here a year from now. My guess is that there will be at least a few more minus signs.

Full Disclosure - Long GLD only at time of writing.

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Anonymous said...


I think you mean DGP in the text when referring to the Powershares Double Gold

Tim said...

Fixed - thanks.

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