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Articles on DBB

  • Long Short Commodity and Currency ETFs Can Be Useful to Diversify Your Portfolios

    06/21/2011

    Recent market volatilities reminded investors that risk is heightened. For a long term retirement investor, diversification among assets is the first step. On the other hand, some long short strategies in alternative asset classes such as commodities and currencies can be used to further tame market fluctuation.

    In the recent financial crisis investors took huge hits. During the financial crisis, some smart investors invested in alternative area such as Exchange traded funds (ETF's) that tap into managed-futures strategies popular with hedge funds and commodity-trading advisors. For these investors, they were rewarded as these managed futures based ETFs performed well during that period.

    The managed futures strategy is nothing new; hedge funds and other large, sophisticated investors have been using quantitative methodologies to direct futures-based strategies for years.

    Let's take a look at some of commodity and currency long short strategy based ETFs:  

    Description

    Symbol

    1 Yr

    3 Yr

    5 Yr

    Avg. Volume(K)

    1 Yr Sharpe

    Elements S&P CTI ETN

    LSC

    11.45%

    NA

    NA

    43

    59.01%

    iShares Diversified Alternative

    ALT

    3.54%

    NA

    NA

    24

    88.78%

    WisdomTree Managed Futures

    WDTI

    NA

    NA

    NA

    48

    NA

     

    For more information on ETFs in various asset classes, please refer to MyPlanIQ ETFs in Asset Classes page.


    Clearly the best performer is LSC in the table with the return of 11.43% in a year followed by the ALT with a return of 2.24%. Although the LSC is down from the past week when the returns are 14.43% this is in line with the worldwide corrections in stoks. The expense ratio of LSC is 0.75% which is also the least as compare to the other ETF's. Please find below the May 2011 long/short positioning of the Index sectors as well as the long/short positioning of the prior month.

     


    Sector

    Previous Position

    Current Position

    Weight*

    Energy

    Long

    Long

    37.50%

    Grains

    Short

    Long

    23.00%

    Industrial Metals

    Long

    Short

    10.00%

    Precious Metals

    Long

    Long

    10.50%

    Livestock

    Long

    Short

    10.00%

    Softs (by Commodity)

         

    Cocoa

    Short

    Long

    2.00%

    Coffee

    Long

    Long

    3.00%

    Cotton

    Long

    Short

    2.00%

    Sugar

    Short

    Short

    2.00%

    LSC is based on a well known S&P Commodity Trends Indicator - Total Return index. The Index is designed to apply a long/short strategy to six commodity sectors comprised of sixteen traditional, physical commodity futures contracts. The Index is a total return index designed to reflect the performance of a fully collateralized investment in the futures contracts. Readers can compare LSC with MyPlanIQ's P S and P Commodity Trend Indicators Strategy which models the same S&P CTI index using Powershares DB commodity ETFs such as (DBP), (DBB), (DBA) and (DBO).

    ALT return on the securities is linked to the performance of portfolio foreign currency forward contract and exchange traded future contracts that may involve commodities, currencies, interest rate and certain eligible stocks or bonds indices while seeking to reduce the risks and volatility inherent in those investment by taking long and short positions in historically co-related assets.

    WDTI employs a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the Diversified Trends Indicator (DTI). The index is a composite of 24 highly liquid futures grouped into 14 sectors, with an even split between financials (i.e., currencies and interest rates) and physical commodities. The positions of each sector are either long or short (except for energy) based on price behaviour relative to a moving average (if energy is not positioned long, the sector weight is allocated to other sectors). Sector weights are determined by global production for commodities, and by GDP tiers for financials. Readers again can compare this fund with MyPlanIQ's P S and P Diversified Trend Indicators that, in addition to Powershares commodity ETFs, uses CurrencyShares ETFs such as (FXE), (FXY), (FXA), (FXF), (FXB), (FXC) to model the S&P DTI index.

    The actively managed long short ETFs mentioned above can indeed provide some diversification benefits for a retirement investing portfolio. As these ETFs are relatively new, investors should monitor these ETFs and do their due diligence.

    Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. 

    Symbols: LSC, ALT, WDTI, DBO, DBP, DBA, DBB, FXE, FXY, FXA, Portfolio Strategies, Managed Future ETFs

     

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  • Commodities Withstood the Recent Market Selloff

    03/21/2011

    Commodity ETFs again showed their divergence with other risk assets last week: during the market selloff last week. The broadbase commodity index like Powershares commodity index (DBC) actually registered a 0.78% gain. Natural gas (UNG) had a big jump, gaining 6.83% while gold (GLD) was steady. Silver had the biggest drop of 2.17%. Fore more detailed performance, please refer to here.

    From the following trend score table, one can see the broadbase commodity index (DBC) actually had its trend score increased in last week. 

    Assets Class Symbols 03/18
    Trend
    Score
    03/11
    Trend
    Score
    Direction
    Silver SLV 40.11% 47.09% v
    Energy DBE 16.53% 14.75% ^
    Commodity DBC 14.15% 12.94% ^
    Precious Metals DBP 14.15% 15.87% v
    Agriculture DBA 12.09% 14.21% v
    US Oil USO 10.34% 8.1% ^
    Gold GLD 8.86% 9.46% v
    Base Metals DBB 6.53% 4.5% ^
    Natural Gas UNG -5.95% -13.75% ^
    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

    Amid the somewhat severe and volatile market correction last week, it is relevant to review several commodity themes again here: 

    • Agriculture commodities (DBA): world food price has risen in the past several years and the demand from emerging middle classes outstripped the supply. See Commodities Trends: Food Prices Rose More Than Normal CPIs for more analysis. 
    • Precious metals (gold, silver) (DBP): governments around the globe pumped money to stimulate the economy, let alone the quantitative easing 1-2 by the U.S. central bank would surely make paper currencies less valuable and thus precious metals (Gold and Silver) become the defacto hard currencies. We also pointed out that Silver plays dual roles (as a proxy to hard currency and a proxy to general industrial activities being a metal of practical use). 
    • Energy (Oil (USO) or natural gas (UNG)) (DBE): Amid the middle east political unrests and recent Libyan's upheaval (Libya has the ninth largest oil reserve in the world), oil production is in danger of sudden disruption. 
    • Broadbase commodities (DBC) (GSG): Along with the mentioned factors, recent natural disaster in Japan, the third largest economy in the world, will only add more government supported stimulus, commodity hoarding will only get worse. 
    Though strong fundmentals are supporting commodity investing for now, we should point out that commodities are notorious volatile: geopolitical events and general economic activities (and expectation, such as inflation expection) can change the direction of commodities dramatically. It is thus important to properly allocate in one's portfolios and actively manage a portfolio's asset allocation. Interested readers are referred to several previous articles on the role of commodities in portfolio management: 

    Symbols: SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB ,


    Exchange Symbols: (NASDAQ: SLV), (NASDAQ: DBP), (NASDAQ: GLD), (NASDAQ: DBB), (NASDAQ: DBA), (NASDAQ: DBC), (NASDAQ: DBE), (NASDAQ: USO), (NASDAQ: UNG), (NASDAQ: SPY), (NASDAQ: QQQQ), (NASDAQ: IWM), (NASDAQ: MDY), (NASDAQ: EFA), (NASDAQ: VEU), (NASDAQ: EEM), (NASDAQ: VWO), (NASDAQ: IYR), (NASDAQ: ICF), (NASDAQ: VNQ), (NASDAQ: GSG), (NASDAQ: LQD), (NASDAQ: CSJ), (NASDAQ: CIU), (NASDAQ: HYG), (NASDAQ: JNK), (NASDAQ: PHB), (NASDAQ: TLT), (NASDAQ: IEF), (NASDAQ: SHY), (NASDAQ: SHV), (NASDAQ: BND), (NASDAQ: AGG), (NASDAQ: MUB), (NASDAQ: MBB)

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

     

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  • Schwab ETF Select List Plan Offers Diversification and High Quality Fund Selection

    03/16/2011

    by Kevin Carr, A MyPlanIQ Expert User

    On March 9, 2011, Charles Schwab announced the release of the ETF Select List.  The quarterly Schwab ETF Select List was created by Charles Schwab Investment Advisory, Inc. and is a filtered list of all of the ETFs in the marketplace, highlighting pre-screened, low-cost ETFs.  Schwab used quantitative and qualitative screens to filter each ETF and build the list, covering 6 major asset categories and 45 minor asset categories. All ETFs, including Schwab ETFs, are evaluated using the same criteria and broken into sectors for US Equity, Foreign Equity, Emerging Market Equity, Fixed Income, Commodity and REITs.

    The ETF Select List gives investors a choice of low-cost, pre-screened ETFs.  Schwab highlights just one ETF in each category, chosen based on specific criteria including expense ratio, risk, structure and how well it fits into its category. To make the list, an ETF has to meet minimum criteria that include assets under management, including narrowness of index, trading volume, bid/ask volatility, risk, annualized cost of ownership, fund structure and fit within a given category.  The list excludes exchange-traded notes (ETNs), inverse or leveraged ETFs, actively managed ETFs, and unmanaged baskets of securities.

    While the ETF Select List has only been out a few days, I constructed a plan on MyPlanIQ platform.  The Schwab ETF Select List  has no redemption periods, is commission efficient and offers low expenses. 

    As of March 13, the Schwab ETF Select List Plan has a four star investment menu rating with a 99% diversification score and an overall above average investment choice based on MyPlanIQ Plan Rating methodology .  The Plan Rating methodology is designed to measure how effective a plan’s available funds are using key factors such as diversification, fund quality and portfolio building.

    Attribute   Schwab ETF Select List   Six Core Asset ETF Benchmark
    Diversification   great (99%)   average (63%)
    Fund Quality   above average (70%)   below average (23%)
    Portfolio Building   average (53%)   above average (70%)
    Overall Rating   above average (72%)   average (54%)


    The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

    US Equity: SPY or VTI
    Commodity: DBC
    Foreign Equity: EFA or VEU
    REITs: IYR or VNQ or ICF
    Emerging Market Equity: EEM or VWO
    Fixed Income: AGG or BND

    Performance chart (as of Mar 15, 2011)



    Performance table (as of Mar 15, 2011)

    Currently Commodities, Real Estate and US Equity are doing well. These asset classes are available to Schwab ETF Select List participants.

    To Summarize, Schwab ETF Select List Plan offers wide diversification, high quality funds with low expenses. compared with other brokerage supported ETF plans, it is very favorable. From time to time, we will review the plan.

    Symbols:DBC,DBA,IAU,DBB,USL,PFF,VNQ,XLY,XLP,XLE,XLF,XLV,XLI,XLB,XLK,IYZ,XLU,BND,SCHO,SCHR,TLH,SCHP,CIU,JNK,BWX,MUB,SCHF,EFG,EFV,SCHC,SCHE,VEU,VT,VGK,VPL,EWJ,GXC,SCHX,SCHG,SCHV,VO,VOT,VOE,SCHA,VBK,VBR,SCHB,VYM,

    Symbols (exchange): (DBC),(DBA),(IAU),(DBB),(USL),(PFF),(VNQ),(XLY),(XLP),(XLE),(XLF),(XLV),(XLI),(XLB),(XLK),(IYZ),(XLU),(BND),(SCHO),(SCHR),(TLH),(SCHP),(CIU),(JNK),(BWX),(MUB),(SCHF),(EFG),(EFV),(SCHC),(
    SCHE),(VEU),(VT),(VGK),(VPL),(EWJ),(GXC),(SCHX),(SCHG),(SCHV),(VO),(VOT),(VOE),(SCHA),(VBK),(VBR),(SCHB),(VYM)

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  • Commodity Investing: Long Short (S&P Commodity Trend Indicators) vs. Long Only

    03/13/2011

    Last week's market volatility is a good reminder on how precarious it is in commodity investing. For the week, broadbase commodity index ETF (DBC) dropped 3.09% while Gold (GLD) fared better, dropping only 0.81%. Agriculture commodity (DBA) dropped even more: 3.71%. For more detailed information, please refer to here.

    It is now generally recognized that adding commodity exposure in a long term portfolio that adopts a strategic asset allocation strategy can increase diversification effect and thus possibly improving risk adjusted returns. However, given the high volatitily (and risk) of commodities, it is important for an investor to understand the difference between a long only approach and long short approach in this asset investment. 

    A long only approach is simply just buying a commodity index such as Powershares DB Commodity Index ETF (DBC) or GSCI commodity index (GSG)  (or sub index such as agriculture (DBA), precious metal (DBP)). A long short approach, on the other hand, can take long and/or short positions on mutliple commodity components simultaneously. It is mostly based on technical indicators such as moving averages, momentums and reversals. This approach has been adopted by professional CTAs (Commodity Trading Advisors). A simple and popular strategy is the S&P Diversified Commodity Trend Indicators. The following is a short description of the strategy: 

    The strategy is a simplified variation of  S&P commodity trends indicator (CTI). It is a subset of the S&P DTI by simply eliminating half of the financial assets.

    1.The original asset allocation

     

    Energy  37.5%

    Powershares DB Energy  (DBE)

    Industrial metal  10%

    Powershares DB Base Metal  (DBB)

    Precious metal  10.5%

    Powershares DB Precious Metal  (DBP)

    Agriculture  42%

    Powershares DB Agriculture  (DBA)

    2. Position determination

    The monthly percentage change of a sector’s price is compared to past monthly price changes exponentially weighted to give greatest weight to the most recent return and least weight to the return seven months prior.

    The weights are as follows:

    NUMBER OF MONTHS

    WEIGHT

    2.32%

    6

    3.71%

    5

    5.94%

    4

    9.51%

    3

    15.22%

    2

    24.34%

    1

    38.95%

    3. Monthly rebalancing

    The portfolio is rebalanced monthly by setting every sector to their original percentage and do the position determination again.

    For more information, please refer to
     "Standard and Poor's Commodity Trend Indicator" document. 

    The following table compares the performance between such S&P Commodity Trend Indicators Portfolio (S&PCTI)  and a general broadbase commodity ETF (DBC):

     

    Portfolio

    Last 3 Years

    Last 1 Years

    2007

    2008

    2009

    2010

    2011

     

     

                 

    AR(%)

    S&PCTI

    5.049

    14.884

    15.939

    23.768

    2.282

    3.186

    5.148

    AR(%)

    DBC

    -8.826

    25.383

    31.579

    -31.799

    16.187

    10.154

    7.695

    Sharpe Ratio(%)

    S&PCTI

    29.127

    113.142

    91.832

    107.569

    14.048

    23.723

    39.12

    Sharpe Ratio(%)

    DBC

    -20.516

    150.174

    160.984

    -97.51

    58.736

    52.501

    415.108

    Standard Deviation(%)

    S&PCTI

    16.389

    13.074

    16.719

    21.232

    15.572

    13.045

    13.119

    Standard Deviation(%)

    DBC

    27.914

    18.435

    17.728

    34.962

    27.397

    19.578

    15.275


    Though S&PCTI under performed in 2009, 2010 and 2011, it out performed DBC in the last 3 years. This is because it had 23.8% return in 2008, compared with DBC's 31.6% loss in the same year. Furthermore,  S&PCTI has a standard deviation 16%, compared with DBC's 28%. In fact,  S&PCTI's standard deviation is consistent with that of an overall stock market index such as S&P 500 (SPY). 

    It is perhaps even more important to pay attention to maximum drawdowns for S&PCTI:  since its inception 10/1/2007 (this is due to the short histories of commodity ETFs used in this portfolio), the maximum drawdown is about 19% vs. DBC's whopping 60% (during the 2008-2009 detacle). 

    The takeaway from this article is that for active investors, one might want to consider adopting a more conservative approach in commodity exposures. Investors can find Element's ETN (LSC) or Direxion's Commodity Trend Strategy Inv (DXCTX) that implement the S&P  Commodity Trend Indicators strategy. Before you invest, however, you are encouraged to compare the portfolio S&PCTI, LSC and DXCTX.

    In the follow up articles, we wil further compare how the long only and long short strategies can be used in strategic and tactical asset allocation portfolios. 

    Symbols:SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,


    Symbols (exchange): (NYSE:SLV), (NYSE:DBP), (NYSE:GLD), (NYSE:DBB), (NYSE:DBA), (NYSE:DBC), (NYSE:DBE), (NYSE:USO), (NYSE:UNG), (NYSE:SPY)

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical 

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  • Commodity ETFs: Does Everyone Need Energy Investment?

    03/07/2011

    Last week is another strong week that saw strong ascent of commodity ETFs across the board (other than natural gas ETF (UNG)). US Oil (USO) and Silver (SLV) shot up more than 6% while broadbase commodity ETF (DBC) gained 2.56%. For more detailed performance, see here

    The unrest in middle east drove oil prices higher again: WTI crude oil reached $104 per barrel. According to an article by Jason Zweig on The Wall Street Journal, $1.4 billion new money was poured into energy related investments in just one week ended on last Wednesday. Speculation is abound. 

    A broadbase commodity index ETF usually has adquate energy related exposure. For example, Powershares DB Commodity Index (DBC) has the following weights:

    Commodity Contract Expiry Date Index Weight Base Weight
    Aluminium 9/21/2011 3.90% 4.17%
    Brent Crude 2/14/2012 13.52% 12.38%
    Copper - Grade A 3/21/2012 4.24% 4.17%
    Corn 12/14/2011 5.47% 5.63%
    Gold 8/29/2011 7.03% 8.00%
    Heating Oil 5/31/2011 13.70% 12.38%
    Light Crude 6/21/2011 12.54% 12.38%
    Natural Gas 9/28/2011 4.40% 5.50%
    RBOB Gasoline 11/30/2011 13.47% 12.38%
    Silver 12/28/2011 2.16% 2.00%
    Soybeans 11/14/2011 5.51% 5.63%
    Sugar #11 6/30/2011 5.23% 5.63%
    Wheat 7/14/2011 5.17% 5.63%
    Zinc 5/18/2011 3.65% 4.17%

    Energy exposure in DBC amounts to 57.63% as of 3/3/2011!  

    In the article, Zweig questioned whether one needs to have energy stocks, especially energy company stocks made up 13% of S&P 500 index. We concur with him that investors should be cautious in the face of such a speculative rush. On the other hand, a portfolio that has commodity exposure can be more diversified and thus, reducing risk and enhancing return in general. This is not necessarily always the case. The following table compares the performance of a portfolio with 5 core assets: US Equities (VTI), Foreign Equities (VEU), Emerging Market Equities (VWO), REITs (VNQ) and Total Bond Index (BND) and a portfolio with an extra asset (DBC). 

    Portfolio Performance Comparison

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate 16% 127% 6% 27% 8% 33%
    Six Core Asset ETFs Strategic Asset Allocation Moderate 16% 131% 5% 22% 7% 35%

    The portfolio with the additional commodity asset slightly under performed. On the other hand, if one adopts a tactical asset allocation strategy, adding the commodity asset will improve the performance and Sharpe ratio: 

    Portfolio Performance Comparison

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETFs Tactical Asset Allocation Moderate 15% 110% 11% 83% 15% 102%
    Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate 11% 80% 10% 81% 13% 85%


    The following table illustrates the trend score among commodity ETFs. 

    Assets Class Symbols 03/04
    Trend
    Score
    02/25
    Trend
    Score
    Direction
    Silver SLV 46.52% 44.61% ^
    Agriculture DBA 18.61% 18.17% ^
    Energy DBE 17.6% 17.3% ^
    Commodity DBC 16.8% 16.74% ^
    Precious Metals DBP 15.95% 15.56% ^
    US Oil USO 12.94% 9.09% ^
    Base Metals DBB 10.0% 13.17% v
    Gold GLD 9.66% 9.84% v
    Natural Gas UNG -19.04% -13.96% v

    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).


    The takeaway is that one can gain energy exposure by investing in broadbase commodity ETF. Investing in a broadbase commodity does not automatically guarantee performance and risk improvement. One has to adopt a tactical (or dynamic) approach to achieve such a goal. 

    Symbols:SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,VTI,VEU,VNQ,VWO,BND,AGG,SPY,EFA,EEM,IYR,

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. 

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  • Energy Commodities and Gold Strong: Gold's Role in Asset Allocation

    02/26/2011

  • Commodity ETF Trends: Silver Breaks Out, Gold Steady Amid Commodity Strength

    02/20/2011

  • Beware of Divergence Among Energy Commodity ETFs

    02/14/2011

  • Commodity Trends: 2010 Year End Review

    01/03/2011

  • Silver and Gold Continued to Shine While Other Commodities Largely Stable

    12/19/2010

  • Broad Based Commodities Strong, Precious Metals Continue Correction

    12/11/2010

  • As Gold/Precious Metals Correct, Agriculture Commodities Stay Strong

    12/03/2010

  • Commodities Nov 29

    11/30/2010

  • Commodities Mixed -- Some up, Some down

    11/23/2010

  • Commodity ETFs Show Muted Downturn This Week

    11/20/2010

  • Commodity Indicators for Week of November 15th

    11/17/2010

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