February 8, 2006
DB Commodity Index Tracking Fund (DBC)
Deutsche Bank Launches First Commodity-Index-Linked Fund Traded on a US Securities Exchange
DB Commodity Index Tracking Fund (DBC) returns are expected to track the performance of the Deutsche Bank Liquid Commodity Index (DBLCI). The DBLCI is a rules-based index, comprised of Crude Oil, Heating Oil, Gold, Aluminum, Corn and Wheat. The DBLCI is calculated based on six liquid futures contracts on the commodities comprising the Index. DBC also will generate interest on cash invested in the tracking fund.
Interesting that it’s based on only six contracts. It’s nice to have a commodity index-based ETF available, and I’ll be watching to see how liquid it is. Launching this ETF after the run commodities have made in recent years reminds me that “when the ducks quack, Wall Street feeds ‘em.”.
You can download the prospectus here (111 pages). Table of Index Weights
Looking through their promotional brochure I see that they’re pretty shameless about touting the DBLCI’s recent performance, though they’re quick to add “past performance should not be taken as an indication of future performance.” If they were honest, they would print the table of closing levels for the Index all the way back to 1989 right up front.
For example, the closing level in 1990 was 162.39 and in 2001 was 176.01 for a whopping return of about 8% (I’m doing it in my head) over all those years… and that’s not even considering the fees and taxes that the fund would have generated over that time.
Uncle Morty taught me the value of always reading the fine print. When someone’s trying to sell you something, take your time, ask a ton of questions, and always think: who’s making money here and how are they making it?
When my Mom bought her first fund long ago she asked the saleswoman: “How do you get paid?” The saleswoman answered: “Don’t you worry about how I get paid.” (I still get furious when I think about this exchange.) If it had been a salesman he probably would have said: “Don’t you worry your pretty little head about how I get paid.” The lesson is you should always worry your pretty little head about how (and how much) the other guy gets paid.
February 9th, 2006 at 12:09 am
LOL. Same question I asked a stock broker in 1994 about funds. He did the old “Hello my honey” tapdance routine.
February 9th, 2006 at 12:22 am
Oh, I bought by the way. :{
February 9th, 2006 at 8:20 am
Yeah, so did my Mom. :-(
(Neither Uncle Morty nor I were present.)
February 22nd, 2006 at 9:58 am
You should understand what you are investing in before commenting on it. Commodities futures perform best when the market tanks. You don’t want them to be doing well because that means stocks are kicking butt. Commodities are volatile so even a small percentage in your portfolio will reap risk adjust rewards when combined with annual rebalancing because when stocks tank commodities futures have historically done REALLY well. You also need to note that this fund (and other commodities funds) use the collateral from investing in T-bills (or TIPS) to invest in the futures contracts. When you combine the low correlation returns from bonds and the negative correlation returns from commodities futures you have a terrific hedge for a bear market. The returns of Tbills and commodities combined over the the time period you mentioned (using returns shown in the DBC prospectus and published 3 month T-bill returns) would actually average a 12.22% annual return up to October 2005. This includes 1.90% in fees taken out. $10,000 would grow to over $40,000. So as you can see you get equity like long term returns along with improved risk reduced performance in your overall portfolio. DBC is not the best fund (it’s too expensive) but I wouldn’t knock it so quickly. You need to look past the numbers at first blush and understand the value a commodities futures fund such as this could have in your portfolio.
February 22nd, 2006 at 11:46 am
I’m not knocking the idea of a commodity-index-based ETF — in fact I think it’s a great idea and totally understand its value in a balanced portfolio.
I was just trying to point out the irony that the public has a chance to buy it *after* the DBLCI has made a huge move. No one is trumpeting the average annual returns (after fees and taxes) from 1991 through 2001.
I agree that DBC is too expensive (Expense Ratio 1.90% Yow!). Do you know of a cheaper alternative? (I own the Materials SPDR (XLB) already.)
Thanks for your comment.
March 16th, 2006 at 11:54 am
The 1.90% expense ratio applies to the Authorized Participants who purchase from the Fund, not from the Amex. Only broker-dealers may invest directly in the Fund. On the other hand, as an individual investor, you pay customary brokerage fees to your broker in order to purchase Amex listed shares. Therefore, you only pay customary broker fees.
March 16th, 2006 at 1:44 pm
Just to clarify… from the Prospectus:
March 17th, 2006 at 12:49 am
Hi guys,
I am actively looking for an agriculture commodity fund (corn, sugar, wheat, beans, etc.), do you guys have any recommendations? I believe that the next class of commodities on the move to new highs will be agri-based liquid commodities as mentioned above, but buying DBC will put me overweight in crude oil which is already a noticeable part of my portfolio.
Thanks for any input.
March 17th, 2006 at 11:21 am
To clarify, and in response to comment #7, the confusion results from the fact that there are two types of investors — those who are Authorized Participants (who are institutional broker/dealers) who buy shares directly from the Fund and those investors who are individuals, who are only able to invest via the Amex. For the first type of investors, the APs, they are subject to the 1.90%. The 3% no longer applies because the initial offering period has already ended and therefore, the 3% fee may no longer be charged. Individual investors only pay brokerage commissions. Their Shares, purchased through their brokers, will then track the performance of the Index. Individual investors own Amex listed equity.
April 6th, 2006 at 5:46 pm
John: Individual investors pay annual fund operating expenses, which are deducted from the Fund’s assets, as well as brokerage commissions.
April 8th, 2006 at 9:12 am
CM: That’s true for ordinary funds which permit individuals to invest directly in such funds.
Because individual investors CANNOT purchase shares from the Fund (but only from the Amex), the individual is not directly subject to operating expenses. Instead, APs are the ones who pay directly. The objective of the fund is to track the Index. In turn, shares traded on Amex will track the Index whenever any arbitrage opportunities exist. Therefore, the pricing between the public shares and the net asset value of the fund will be quite close.
That said, don’t forget that most assets of the fund will be invested in US Treasuries, which pay over 4%. It is expected that this interest income will surpass the expenses of 1.3%. (Expenses were decreased from 1.9 to 1.3.) Because the interest income is expected to surpass fund expenses, the fund’s performance will not be dampened by the operating expenses, etc.
April 14th, 2006 at 9:39 am
[…] USO started trading this week. As you can see from the 15-minute chart below, it’s pretty active. You can get a copy of the prospectus here. Along with the DB Commodity Index Tracking Fund (DBC), this an another new ETF I will watch closely. […]
April 27th, 2006 at 10:31 am
[…] Excellent commentary by Bill Miller that everyone should read closely. (I made basically the same points he does, though much less articulately, in my “when the ducks quack” post about the DB Commodity Index ETF.) Cat: […]
July 7th, 2006 at 9:51 am
[…] In any event, the DB Commodity Index Tracking Fund isn’t the only game in town anymore. […]
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