GSC Goldman Sachs Small Cap Core Equity ETF

Thanks to the sovereign debt crisis in Europe and a strong dollar at home, commodities have been a terrible place to invest this year. Most commodity ETFs and ETNs tracking the broad market have lost at least double digits in the year-to-date period with even heavier losses coming during Q2.

Given these realities and the lack of consensus over how to proceed in Europe, many are forecasting further weakness in the commodity market as we get into the second half of the year. However, not all investors are bearish on the commodity market, especially in the case of Goldman Sachs.

The controversial Wall Street firm released a report which detailed their predictions for broad commodity indexes over the next 12 month period which pointed to surging prices for nearly all types of products. In fact, the company calls for 41% gains in energy, 23% for industrial metals, 18% for precious metals while the lone loser is expected to be agricultural products with a 14% loss over the next 52 weeks (read Hard Times In Soft Commodity ETFs).

According to Jeffrey Currie, head of commodities research for the firm in New York, broad commodity markets—as represented by the S&P GSCI Enhanced Commodity Index—will rally nearly 30% as Europe stems the debt crisis tide while America and China continue to recover a decent pace.

"Although the macroeconomic backdrop still remains uncertain, particularly in Europe, we believe that the sell-off in commodity prices is likely overdone and the price risks are shifting more to the upside," Currie wrote in the report.

While the company may have made some bad decisions in the past, Goldman has undoubtedly made some solid predictions before when it comes to the markets. As a result, some intrepid investors who believe that a turnaround is at hand could wish to cycle into commodity markets at this time (see Three Commodity ETFs That Have Not Surged).

After all, it has to be at least a little encouraging that a major Wall Street firm is so bullish on commodities at this time. Furthermore, given the money printing policies by central banks around the world, a return to real asset investing could be at hand in no time at all, suggesting that it may be time to get in on these beaten down assets.

Fortunately for these investors, there are literally dozens of ETFs and ETNs targeting the commodity market offering up a wide variety of choices in the space. Below, we have highlighted three ETFs which we think could be well positioned if Goldman Sachs’ commodity prediction comes true:

GS Connect S&P GSCI Enhanced Commodity ETN (GSC)

An easy choice to play Goldman’s commodity forecast is with their own ETN, GSC. The product also tracks the same index that the firm is expecting to produce a 29% return over the next 12 months, so it should be an excellent proxy for the accuracy of Goldman’s commodity team.

The note currently trades at a slight premium to NAV and has a rather high expense ratio, coming in at 1.25% per year.  Volume is a little light at around 17,000 shares but this is likely to be a decent level given the liquid nature of the underlying holdings (see Is HAP The Best Commodity Producer ETF?).

In total, the product does hold 23 different securities in its basket with heavy weights going to the energy (65%) space, followed by agriculture (25%), and then a 10% combined allocation to metals both industrial and precious. In terms of individual commodities, three energy products take the top three spots; WTI crude (32%), Brent oil (13%), and natural gas (8%).

Clearly, the product is heavily tilted towards what the firm believes will be the top performing sector over the next 12 months in the commodity space. However, it is important to remember that it also believes that agricultural commodities will be the worst spot and that this segment accounts for roughly one-quarter of the total.

iPath Pure Beta Broad Commodity ETN (BCM)

Another way to play the broad commodity markets is via BCM. The product trounces GSC in terms of expenses at just 75 basis points a year, but it holds far less securities in its basket and its volume is just 8,000 shares a day on average.

This can produce a slightly bigger bid ask ratio which can increase the total cost for investors. Furthermore, it is important to note that like GSC, this is an ETN and thus has the credit risk of the underlying institution but can easily track the underlying benchmark (Should Investors Consider Commodity Country ETFs?).

In terms of holdings, this product shines compared to many of the others in the space—for those looking to tilt their portfolio like Goldman Sachs might—with energy taking the top spot at 42%. While this is less than the counterpart fund, this one puts just 18% in agriculture while giving nearly 26% to precious metals and another 14% to industrial metals.

With this breakdown, the note is much more spread out among the component groups while still maintaining less in the predicted to underperform agricultural segment. Furthermore, the top four holdings gives investors a nice mix of sectors with WTI crude (24%) leading the way followed by gold (21%), soybeans (10%), and Brent oil (10%).

PowerShares DB Energy Fund (DBE)

Since Goldman Sachs predicts energy to be such a strong performer, some investors may want to just focus on the sector. For these traders, a look at PowerShares’ ultra-popular DBE could be an intriguing choice.

The product tracks the DBIQ Optimum Yield Energy Index Excess Return which is a rules based benchmark consisting of some of the most heavily traded energy commodities on Earth. The product also sees solid volume of 122,000 shares a day while it charges an expense ratio of 78 basis points a year to investors.

Currently, the basket consists of just five commodities with the vast majority tied up in oil and oil-derivatives. In fact, natural gas accounts for just seven percent of the portfolio while WTI crude, heating oil, Brent crude, and RBOB Gasoline each account for roughly 23% each of the fund.

In addition to focusing solely on energy, the product is the only ETF on the list as well. This means that tracking error can be an issue but credit risk of the issuer is not a problem at all (read Beware The Coming ETN Backlash).

Lastly, investors should note that this product is structured as a limited partnership for tax purposes while the other two on the list are not. This can produce some headaches at tax time—such as a K-1— but if Goldman Sachs’ prediction regarding energy holds true, it could be worth it to some risk tolerant investors.  

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IPATH-PB BR CMD (BCM): ETF Research Reports
 
PWRSH-DB EGY FD (DBE): ETF Research Reports
 
GS-CONN SP E CM (GSC): ETF Research Reports
 
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