GSG: A Good Commodity Play, But Better Performing Options Available

Commodities are starting to show some signs of life again as inflation begins to pick back up. It’s not just Oil. Copper, Gold, Silver, and a slew of others look to be ready to resume their own respective uptrends as investors look for inflation plays outside of equities. This is where the iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA:GSG) comes into play as an easy option to position into the commodity space.

GSG is an ETF that tracks the results of a fully collateralized investment in futures contracts on an index composed of a diversified group of commodities futures. It offers investors exposure to a broad range of commodities, making it a potentially valuable addition to a diversified portfolio. GSG has net assets of over $1 billion. The fund has a fee of 0.75%, which is considered relatively high due to the active management of commodity futures contracts.

Detailed Analysis of GSG’s Portfolio

The sector composition of the GSG ETF reflects the importance of various commodities in the global economy. The largest sector weighting is to energy commodities, reflecting the crucial role of energy in various industrial applications. This heavy allocation to energy commodities suggests that the fund’s performance is likely to be influenced significantly by changes in energy prices.

The fund’s allocation to other sectors provides exposure to different areas of the commodity market. For instance, the allocation to agriculture commodities provides exposure to the performance of crops and other agricultural products, while the allocation to precious and industrial metals offers exposure to commodities such as gold, silver, copper, and aluminum.

In terms of weightings, energy commodities account for more than half of the fund’s total assets. This heavy allocation to energy commodities could make the fund more sensitive to changes in energy prices. However, the fund’s diversification across different commodity sectors could help to offset this risk.

Peer Comparison

When compared to other similar ETFs, GSG stands out for its focus on a broad range of commodities. Other ETFs may focus on specific sectors of the commodity market, such as energy or agriculture, but the GSG ETF provides exposure to a diverse group of commodities futures.

One notable competitor is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), which also seeks to provide exposure to a diverse range of commodities. However, PDBC follows the DBIQ Optimum Yield Diversified Commodity Index, which has a similar energy weight to the GSG ETF but uses a different methodology for selecting and weighting commodities.

Another competitor is the Direxion Auspice Broad Commodity Strategy ETF (COM), which uses a unique methodology that allows it to take long or flat exposure to individual commodities based on their recent price trends. This approach can lead to a different sector composition and performance compared to the GSG ETF.

Unfortunately, GSG has underperformed both PDBC and COM. It would appear the methodological differences and sector weightings make those funds perhaps more alpha-generating than GSG.

Pros and Cons of Investing in GSG

Investing in GSG offers several potential benefits. First, it provides exposure to a broad range of commodities, offering diversification benefits that can help to reduce portfolio risk. Second, because the GSG ETF tracks a commodity index, it offers a passive investment strategy that can be more cost-effective and less time-consuming than actively managing a portfolio of individual commodity futures contracts.

However, investing in the GSG ETF also carries several risks. Commodities markets are known for their volatility, and the prices of the commodities that the GSG ETF tracks can fluctuate widely due to factors such as changes in supply and demand, geopolitical events, and economic conditions. Additionally, because the GSG ETF invests in futures contracts, it is subject to the risks associated with these derivatives, including the risk of margin calls and the potential for losses if the price of the underlying commodity falls.

Furthermore, the GSG ETF’s heavy allocation to energy commodities could make it more sensitive to changes in energy prices. If energy prices fall, the value of the GSG ETF could decline, potentially leading to losses for investors. Finally, as noted, it has underperformed other commodity funds it competes against.

Conclusion: To Invest or Not to Invest?

GSG is a good commodity fund for what it does, as it offers an opportunity for investors to gain exposure to a broad range of commodities through a single investment. Its focus on a diverse group of commodities futures can provide diversification benefits, and its passive investment strategy can offer a cost-effective way to invest in the commodity market. However, it has lagged meaningfully other broad based commodity ETFs in the same space, perhaps making it one to pass on if comfortable with those other funds. Regardless, it’s still one to consider.