PALL Abrdn Palladium ETF Trust

As the broad markets are approaching their all-time highs, investors are gaining confidence over the riskier asset classes. As such, equities and equity ETFs are showing heavy inflows this year on the heels of improving global economic conditions (read: 3 ETFs Beating the S&P 500).

In this backdrop, commodities like gold, agriculture and industrial metals have experienced some weakness due to a lack of investor interest and a strong dollar. The fears of a deepening euro zone crisis of late has also taken a toll on these commodities, hurting demand for raw materials, further adding to their woes.

However, despite the overall negative sentiment, a couple of commodity ETFs have impressed with their performances so far this year. Interestingly, these top performers have been spread out among various commodity groups and could act as better plays in the current market.

This suggests that there have been winners in every corner of the space, implying that investors who have been burned by broader-based commodity funds this year may want to consider looking at any of the following commodity ETFs that we have highlighted below (see more ETFs in the Zacks ETF Center):

Cotton ETF

Cotton, the only soft commodity on the list, could be a strong performer this year thanks to strong demand in China and rising global fiber consumption. In addition, cotton plantings are expected to decline 27% this year, touching the lowest level since 1983, according to the projection led by the National Cotton Council (read: Invest Like Morgan Stanley with These 5 Commodity ETFs).

Investors seeking to play this rally in cotton prices could find iPath Dow Jones-UBS Cotton Subindex Total Return ETN (BAL) an intriguing option in the space. Launched in June 2008, the note follows the Dow Jones-UBS Cotton Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on cotton.

The product has failed to attract investors with just $46.3 million in assets and average daily volume of roughly 26,000 shares. This ensures a modest additional cost to investors in the form of a wide bid/ask spread beyond annual fees of 75 bps a year. The note added about 14.59% year-to-date.

Gasoline ETF

Within the energy space, gasoline seems to have move higher on solid demand and disruptions in gasoline supply. Further, an improving job market and recovering global economic fundamentals also support the bullish trend for gasoline prices.

Investors looking to make a concentrated play on the gasoline segment of the energy market could choose United States Gasoline Fund (UGA). The ETF allows investors to directly make a play on the commodity of RBOB gasoline and provides a vehicle to hedge gasoline movements (read: Pump Profits with This Gasoline ETF).

The fund tracks the changes in percentage terms of its units’ net asset value to reflect the changes in percentage terms of the price of gasoline. This is measured by the changes in the price of the futures contract on unleaded gasoline traded on NYMEX that is the near month to expire, except when the near month is within two weeks of expiration. In such a case, the next month’s contract will be used instead.

The ETF is less liquid with daily trading volume of about 31,000, suggesting a wider bid/ask spread. As such, investors have to pay extra beyond the annual fee of 60 bps in fees per year. The fund has managed assets of $58.3 million and gained 3.13% so far in the year.

Palladium ETF

In the precious metal space, palladium could be considered an extremely lucrative investment avenue given its growing demand and decreasing supply throughout the year.

An improving auto industry and growing consumption of palladium in cell phones, computers and jewelry should provide a nice boost to the white metal's demand. On the other hand, supply of palladium is going through certain disruptions due to the labor dispute in South Africa, production cuts at unprofitable mines and diminishing stockpiles in Russia.

With the global demand for palladium and the auto industry expected to remain robust, and supply at an all-time low, the price of the metal seems likely to go up going forward (read: Palladium ETFs to Rally in 2013?).

Investors looking to take advantage of this possible price rise should focus on the only pure play ETF Securities Physical Palladium Shares (PALL) in the space. Launched in Jan 2010, the fund seeks to match the spot price of palladium, net of fees and expenses and own palladium bullion in plate or ingots to back the shares.

With total assets of $582.2 million, PALL tracks almost 100% the physical price of palladium bullion subject to LPPM rules for Good Delivery, and kept in Zurich or London under the custody of JPMorgan Bank.

The ETF is relatively pricey though, charging investors 60 bps in annual fees. Additionally, it has a wide bid/ask spread, which increases the total cost for this fund thanks to the average daily volume of 75,000 shares. The fund is up 7.86% year-to-date and has a Zacks ETF Rank of 2 or ‘Buy’, suggesting that the product is expected to continue its bull run over the next one-year period.

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IPATH-DJ-A COTN (BAL): ETF Research Reports
 
ETFS-PALLADIUM (PALL): ETF Research Reports
 
US GAS FUND LP (UGA): ETF Research Reports
 
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