Monty Racusin
I remain broadly bullish on commodities, mainly because I believe the Chinese economy may have bottomed out. China is a major consumer of industrial metals, which means you can get exposure to China without investing in China through commodities A by-product of their economic activity. If you share the same uptrend, then… Invesco DB Base Metals ETF (NYSEARCA:DBB) is worth a look.
This is an exchange-traded fund that tracks the excess return of the DBIQ Optimum Industrial Metals Index. This index tracks futures contracts for three of the world’s most valuable industrial metals: aluminium, copper and zinc. The fund was created to give investors exposure to commodity futures contracts for a fee of 0.75%.
A closer look at DBB Holdings
DBB is designed to give investors exposure to the base metals market with a well-diversified portfolio. Copper, zinc and Aluminum futures are equally weighted here, providing a nice, balanced mix from an industrial use standpoint.
invesco.com
DBB guarantees futures positions on 100% of U.S. Treasury securities, money market funds and Treasury bills. This explains those holdings.
It is worth addressing specifically why each of these properties is industrial in nature. First, let’s talk about copper. This industrial metal is a ubiquitous part of everyday life, used in electrical wiring, plumbing, construction and manufacturing. Aluminum is used in many things because of its high strength and good electrical conductivity. In the transportation and packaging industries, aluminum remains the most dominant element, for example, which can be seen in the automotive and can industries. Finally, when it comes to zinc, it is an important element in galvanized steel. It is an essential component of coating steel bars and iron bars for infrastructure projects and construction works. It is also used to create copper and bronze alloys, so it can be said that the production of both stainless steel and galvanized steel is where a lot of zinc metal is found.
Diversification and equal weighting of these three commodities mitigates the risks involved with overexposure to a single metal, while allowing investors to remain exposed to significant upside across the broader base metals sector, especially if China returns to accelerating the pace of its economy.
Peer comparison: DBB vs other BCIM
There aren’t any pure competitors to DBB, but the abrdn Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM) is worth comparing with. BCIM is not equal in weight, and includes nickel and lead in the allocation. When we compare the two funds to each other by PE ratio, we find that DBB has outperformed due to the more concentrated exposure here.
Stockcharts.com
Pros and Cons
On the plus side, DBB provides exposure to three of the most commonly used base metals, which are used in a wide range of industries, from infrastructure and construction to manufacturing. Increased demand for the DBB ETF will likely benefit as the global economy moves forward, especially the Chinese economy. The downside is that investing in commodity futures is essentially speculative and volatile. There are a host of factors other than the global economy that can affect base metal prices, such as supply and demand, geopolitical tensions, or wild currency fluctuations.
No need to beat a dead horse here, but the real driver of this is China, the world’s largest importer of copper. Now to be clear, I am not claiming that we are resuming the China-led supercycle as we saw in the 2000s. With widespread underinvestment in commodities over the past decade, the point is that any marginal recovery in demand for these commodities relative to supply is bound to lead to some nice, huge gains without a major economic acceleration that pushes their prices upright.
Conclusion
Total? I like the Invesco DB Base Metals Fund ETF. I believe it is a clean and pure way to invest in the three most available industrial commodities, and the fund does so in a way that is difficult to replicate for most investors, given the futures position necessary for the exposure. If you are optimistic about a recovery in global manufacturing activity, and China in particular, this is a good way to go about it. It makes more sense here than it did two years ago.
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