How to Profit from Falling Commodity Prices with Inverse ETFs

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Commodity prices increase to the point you think they will always go up, but then they suddenly start to drop. You can use ETFs and ETNs to profit when commodities drop in price. Commodities like oil, wheat, corn or precious metals. Here is a comprehensive list of ETFs and ETNs to profit when commodity prices drop.


There are several ways to profit from falling commodity prices. You can buy put options on the companies that produce the commodities. But put options have a finite time limit. You can short these companies or you can trade on the commodity futures market which can be more risk than many traders and investors want. With inverse ETFs and ETNs, you profit from falling commodity prices.

Differences between ETFs and ETNs


ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes) are not the same. An ETN is a debt note and an ETF actually holds the stocks or commodities. There are also tax differences; you should understand these differences before investing in them [1].

Inverse ETFs and ETNs


There are ETFs that will short the commodity like oil, precious metals and agriculture commodities and some that will short the companies involved in the producing of the commodity. These ETFs are called inverse ETFs, reverse ETFs, short ETFs and bear ETFs. An inverse ETF will gain when the underlying benchmark drops. They will do the shorting for you without you having to have a margin account.

The more risky inverse ETFs are leveraged ETFs. You can see these with 2x and 3x in their names. The 2x leveraged ETFs have a leverage ratio of 2:1 and the 3x is leveraged at 3:1. If the underlying index of a leveraged ETF rises by 1%, you would gain either 2% or 3%. This also means you can lose more, if the underlying index drops by 1%, you would lose 2% or 3%.

Inverse ETFs to Short Industrial and Precious Metals


Gold and silver have gone up nicely the past couple of years and could start to drop. This could be a short-term pullback or a long term down trend. Either way, you can profit from these falling gold and silver prices with inverse ETFs. These inverse ETFs and ETNs for metals include:

  • PowerShares DB Gold Short ETN (DGZ) tries to replicate the inverse of the daily price of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return.
  • PowerShares DB Gold Double Short ETN (DZZ) is the 2x (200%) version of DGZ.
  • ProShares UltraShort Gold ETF (GLL) seeks to get daily results that are 200% of the inverse of the price gold bullion.
  • ProShares UltraShort Silver ETF (ZSL) tries to replicate twice (200%) the inverse price of silver.
  • PowerShares DB Base Metals Short ETN (BOS) seeks to replicate the inverse of the Deutsche Bank Liquid Commodity index - Optimum Industrial Metals Excess Return. This index includes metals like zinc, aluminum and copper.
  • PowerShares DB Base Metals Double Short ETN (BOM) is the 200% inverse (twice) version of BOS
  • Direxion Daily Gold Miners Bear 2x Short ETF (DUST). With this ETF, you will not short the actual price of gold bullion, you will be short the gold mining companies. This ETF tries to replicate 200% of the inverse of the NYSE Arca Gold Miners Index price. This index holds companies primarily in the business of mining gold and silver.
  • UBS E-Tracs Short Platinum ETN (PTD): Is an ETN that seeks to replicate the inverse performance of the UBS Bloomberg CMCI Platinum Excess Return index.

Inverse ETFs and ETNs for Falling Agriculture Commodity Prices


If you believe agriculture and food items will drop in price, you can buy ETFs that short them.

  • PowerShares DB Agriculture Short ETN (ADZ) will seek to replicate the inverse price of the Deutsche Bank Liquid Commodity index - Optimum Yield Agriculture. This index includes the crops wheat, sugar, corn and soybeans.
  • PowerShares DB Agriculture Double Short ETN (AGA) tries to replicate twice (200%) the inverse price of the Deutsche Bank Liquid Commodity index - Optimum Yield Agriculture.

Inverse ETFs and ETNs for Oil, Gas and Natural Gas


You can buy ETFs and profit from falling oil and gas prices. These ETFs will track the price of oil and gas while other ETFs will short the oil and gas companies. For a detailed list of these ETFs, please read How to Profit from Falling Oil and Gas Prices.

  • United States Short Oil (DNO)
  • PowerShares DB Crude Oil Short ETN (SZO)
  • ProShares UltraShort DJ-UBS Crude Oil ETF (SCO)
  • PowerShares DB Crude Oil Double Short ETN (DTO)
  • Direxion Daily Natural Gas Related Bear 2x ETF (GASX) shorts the price of natural gas on the ISE-REVERE Natural Gas Index.

The following ETFs can be bought to short the oil and gas companies like Exxon, Chevron, Anadarko and Halliburton.

  • ProShares Short Oil and Gas ETF (DDG)
  • ProShares UltraShort Oil and Gas (DUG)
  • Direxion Daily Energy Bear 3X Shares ETF (ERY)

Inverse ETFs and ETNs to Short All Commodities


You can buy ETFs and ETNs that will short a broad basket of commodities. These include:

  • PowerShares DB Commodity Short ETN (DDP) tries to replicate the inverse price of the Deutsche Bank Liquid Commodity Total Return index. This index includes future contracts on commodities like corn, wheat, crude oil, heating oil, aluminum and gold.
  • PowerShares DB Commodity Double Short ETN (DEE) is the 2x leveraged version of DDP.
  • ProShares UltraShort DJ-UBS Commodity ETF (CMD) is another 2x leveraged ETF that seeks to replicate twice the inverse price of the daily performance of the Dow Jones UBS Commodity index. The DJ-UBS Commodities index contains commodities that are traded on US Exchanges with the exception of aluminum, nickel and zinc.

Inverse Commodity ETFs and ETNs on the London Stock Exchange


There are many more inverse commodity ETFs and ETNs available on the London Stock Exchange.

Conclusion


Understand the differences between ETFs and ETNs and do your research before investing. Know the risks of the leveraged ETFs and ETNs. Make sure there is enough volume and liquidity to ensure you can sell when you want to.

Copyright © May 2011 Sam Montana

Resources
[1] Investopedia.com - ETFs Differences from ETNs



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