The PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC) and the iShares S&P GSCI Commodity-Indexed Trust ETF (NYSEARCA: GSG) are two of the most widely held and actively traded exchange-traded funds (ETF) that track a broad-based, basic commodity market index. Either one of these ETFs is suitable for consideration by investors looking to diversify their portfolio with a general exposure to commodities.
PowerShares DB Commodity Index Tracking ETF
The PowerShares DB Commodity Index Tracking ETF offers a broad exposure to the commodity market through tracking a futures contracts index composed of 14 different commodities, including selections from the energy, precious metals and agricultural sectors. The specific futures contracts held in each commodity are selected to minimize the potential negative effects of contango on the fund's performance. This ETF was launched by Invesco PowerShares in 2006, and as of February 2016, it has total assets under management of $1.85 billion, making it the largest and most liquid basic commodity index ETF. The fund is weighted more heavily toward consumable commodities, such as oil, and less so toward stored commodities, such as gold and silver.
The fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which is a rules-based index comprised of 14 of the most widely traded commodities. The top five holdings in its portfolio are gasoline RBOB (unleaded gasoline) futures, gold futures, Brent crude oil futures, NY Harbor Ultra Low Sulfur Diesel (ULSD) futures and WTI crude oil futures, at 5.37, 5.33, 5.12, 5.10 and 4.65% portfolio weightings, respectively. The fund also holds corn, wheat, soybean and sugar futures.
The fund's five-year average annualized return is -15.11%, and its expense ratio is 0.85%, which is above the 0.76% average for commodity index ETFs. As the fund invests in futures contracts rather than equities, there is no dividend yield offered. The median 12-month tracking error between the fund's net asset value (NAV) and its underlying index is -1.30%.
iShares S&P GSCI Commodity-Indexed Trust ETF
The iShares S&P GSCI Commodity-Indexed Trust ETF was launched by BlackRock in 2006. The fund has $664 million in total assets. This fund, too, aims to provide investors broad-based commodity market exposure. However, this fund is even more heavily weighted toward energy futures, which account for approximately 70% of the fund's portfolio. Metals, agriculture and livestock are also reflected in its performance. The fund tracks the S&P GSCI Total Return Index, which is designed to reflect the overall performance of a diversified selection of commodities that are among the most actively traded on futures exchanges in major developed countries. Unlike ETFs that hold futures contracts on the actual underlying commodities, this ETF holds long futures contracts on the GSCI Total Return Index itself. Also, because the underlying index contains only front-month futures contracts, the fund is more open to the effects of contango than the PowerShares fund.
The fund's five-year average annualized return is -18.02%, and its expense ratio is 0.73%, which is just below average for the category. The fund's median 12-month tracking error between its NAV and its underlying index is -0.55%.
Comparing the Two ETFs
Both of these ETFs offer investors exposure to the overall commodities markets. Both are heavily weighted toward energy sector commodities oil and gas, although the PowerShares ETF is noticeably less heavily weighted in that direction. Therefore, the PowerShares ETF may be more appealing to investors seeking the broadest possible exposure.
Both funds' negative tracking errors are considered minimal and do not represent substantial differences between the funds.
A comparison of the funds' respective performances, with five-year average returns of -15.11% for the PowerShares ETF and -18.02% for the iShares ETF, favors the PowerShares ETF. However, note that these figures were recorded during an overall bear market in commodities, which may have caused the funds to perform differently. With the extra weighting toward energy sector commodities, a surge in oil prices would logically favor the iShares fund, whereas a more broad-based bull market in commodities might well see the PowerShares DB Commodity Index Tracking ETF outperform.
Although the PowerShares fund carries a higher expense ratio, it has greater liquidity with an average bid-ask spread of 0.08%, compared to an average spread of 0.18% for the iShares fund. The smaller bid-ask spread, which reduces transaction costs, at least partially mitigates the difference in expense ratios.