Hottest ETFs of the Week – Commodities Ruling 2011

by ETF Base on March 6, 2011

With oil hitting highs last seen 2 1/2 years ago and gold and silver hitting all-time highs, broad market indices somehow managed a gain on the week.  The battle for Libya continues, with much of the world anticipating the outcome but unsure of the timing or the future governance structure.  Fears over unrest spreading into Saudi Arabia are sparking oil price jumps practically daily.  In US politics, there has been rare pause in major federal legislative debate with financial implications, but the states are starting to take on public sector union costs (see Outrage in Wisconsin).  And in major US corporate news, Steve Jobs made a surprise appearance at the launch announcements for the iPad 2, which was met with broad appeal.  With that backdrop, here are the hottest ETFs of the prior week in both traditional and leveraged fashion:

Non-Leveraged ETFs

BAL – iPath Cotton ETN – Up 15% – There’s nothing to see here folks, no inflation.  That’s what the government numbers keep telling us, surely weekly increases in the price of cotton, oil, metals and all the softs are starting to cost Americans more at the pump, the clothing store and the grocery store.  Cotton suppliers globally continue to struggle with erratic weather conditions and flooding, driving BAL up 52% YTD and 179% over the year ago period.  Note that BAL is an ETN and not an ETF, so investors are subject to solvency risk of the issuer, which is low, but worth noting.

SIL – Global X Silver Miners –Up 9% – SIL is a relatively new ETF at less than a year old, but since its launch in April 2010, it has already racked up a 92% gain.  Comparing these returns to the straight Silver ETF (SLV), the returns are pretty close, at up 98% for SLV over the same time period.  There are some benefits to SIL, as it holds the miners as opposed to silver itself.  As outlined in this article on tax implications for gold, precious metals (silver included) are subject to higher tax rates than mining company ETFs because they are treated as “collectibles”.  So, if you can get the same performance, plus a dividend, maybe the miners are the better long-term hold after all.

OIL – iPATH GSCI Oil –Up 7% -It’s tough to ignore what’s occurring in the Middle East.  After Tunisia, Egypt wasn’t far behind and Libya is just a matter of time.  Protests continue in Bahrain, another oil exporter.  The primary fear at this point is Saudi Arabia.  If discontent spreads there, you’re talking about a primary exporter and the SOLE country with the excess capacity on standby to help quell further price increases.  Given what we witnessed with regard to the elasticity of demand both here and globally at $140 oil, instability in Saudi Arabia could send the global economy into a double dip recession.

Leveraged ETFs

AGQ – Proshares Ultra Silver (2X) – Up 14% – AGQ seeks to return double the daily return of silver.  Obviously, given the return of silver of late, AGQ has been a top performer, but it should be noted that leveraged ETFs all go to zero given enough time.  This is because over time, as trends reverse, both the long and short leveraged ETF of a particular asset class can end up in the red.  As long as the run for silver continues, this doesn’t occur, but a reversal will send shares declining precipitously.  AGQ is up 29% YTD and 256% YTD.

UCO – Proshares Ultra Crude (2X) – Up 13% -With oil hitting highs not seen since the summer of $4 gas before the financial crisis, UCO has been a strong performer, up 13% and 54% over the prior 6 month period.  The same concept applies for UCO of course.  Other plays on energy increases include  OIL cited above, various drilling and exploration companies and ETFs, or even some of the best MLP investments with high yields that return 90% of profits to investors due to the partnership structure.  There’s also a Master Limited Partnership ETF to diversify holdings as well.

The remaining top performing leveraged ETFs are virtually matched to the top performing traditional ETFs.  Other high performing non-leveraged ETFs for the week include the US Gas ETF (UGA) up 4% and the Poland ETF (EPOL) was up 5% for the week as well.

Disclosure: No position in the ETFs covered in this article.

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