Getting A Feel For The DB Commodity Index: DBC

Mar 26, 2011 in Commodities

The business cycle favors different segments of the investment landscape at different times. Good relative strength analysis helps read money flows to give a view on how the market is indicating where we are in the business cycle in terms of stocks, bonds & commodities.

We highlighted the Deutsche Bank Commodity Index ETN (DBC) late last month and let's now take a closer look. One thing about the exchange traded market is that unlike being a stock generalist where various names turn over and you may never come back to some of them, what you learn now about the core ETF/ETN products will likely remain relevant for the rest of your investing life. One such family of indexes to get to know is the Deutsche Bank Commodity indices.

The DB Commodity index has four distinct components: Energy, Agriculture, Base Metals & Precious Metals. Each component has the convenient symbol structure of DB_ with the final letter telling you what it is. ie, DB[E] is Energy.

Deutsche Bank built DBC based on fourteen of the most heavily traded and important physical commodities in the world. "The Index commodity components were chosen based on the depth and liquidity of their markets and to provide diversified commodity performance." It makes sense that since Energy is the most economically important commodity group in the world, it should get the largest weight. That said, Deutsche Bank found a balance for diversification purposes and kept the energy component at 55%.

Below is a graph of the components and performance for this month. You can see that while precious metals have been strong (particularly Silver SLV), that the 10% weighting of Precious Metals is relatively small. The real driver here has been energy. Agriculture ( DBA) is down for the month but this has been dwarfed by the strength in the energy complex.


While commodities are less correlated to stocks than many other indices are to stocks, it should be pointed out that both commodities and stocks are at the core related to economic strength. That is, a bad economy reduces demand for commodities and also hurts corporate earnings, which negatively affects stocks. Correlations over time can be erratic so we need to be careful on assuming too much with regard to the diversification benefits of commodities.


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Comments (5) -

Mar 28, 2011 14:47 #

Chris, would you please address the following from Powershares:

"The PowerShares DB Commodity Index Tracking Fund (Fund) is based on the DBIQ Optimum Yield Diversified Commodity Index Excess Return™ (Index) and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on 14 of the most heavily-traded and important physical commodities in the world."

Is DBC really only producing Excess Returns for investors in the ETF?  Or is it a Total Return product?  Clarity on this would be appreciated.

- Tom

Tom United States

Mar 28, 2011 15:57 #

Hi Tom,

Don't get caught up in some of the naming terminology.     Futures contracts are inherently leveraged vehicles.   So if you took all the money put into the fund and used all of it to buy futures, you would be leveraged up.   So instead, the exposure is adjusted to be a proper blend of futures and cash securities.     Your return is the net of the return on the cash, the change in the futures contract values and less the fees charged by PowerShares.   In terms of managing the product, it is probably somewhat complicated in terms of handling all those details --- but you don't have to worry about this as it is all being handled behind the scenes with rules-based methodologies.   The end result is a product that provides exposure to these commodity markets.     The return for me and you is calculated just as any other product, factoring in the share price and the distribution(s).    

Chris United States

Mar 28, 2011 17:45 #

I 've wondered why ever use DBC, when it is dominated by energy, but instead  DBB, DBP, DBE & DBA (or even better JJG, JJS & COW to capture the three constituents of DBA).  

Using this logic, it could be argued for using the major constituents of DBB, DBB & DBE however in my view the constituents of DBA are less correlated than for the other three.  

Any thoughts?


Graham Critchley Australia

Mar 28, 2011 19:23 #

Its a matter of your comfort level.   I personally am more comfortable working the 'primary markets' ---  Agriculture and Energy clearly fall into this zone.   It can be a bit subjective because I would put gold and silver in the 'primary' category as well.      I am just not comfortable with some of these smaller markets.    BAL and SGG (Cotton and Sugar) --- these actually have higher standard deviations than the 3x Leveraged S&P 500 ETF (URPO).    When working with such large weekly/monthly moves, the risk is just too high for my personal taste.  

Chris United States

Mar 28, 2011 19:36 #

Point taken - for the avoidance of ambiguity, would you care to nominate 25 'primary' markets, or are there more than 25?


Graham Critchley Australia

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