DBA is a fund that attempts to track the price of an index of commodities by buying futures contracts. Commodity ETFs, especially the oil and natural gas ETFs, have been criticized for poorly tracking the underlying commodity. This Business Week article paints a grim picture. Between January 2007 and July 2010 DBA eked out a 3 percent total gain while the weighted average of its underlying commodity components rose 19 percent. Business week identifies contango as a culprit stating "Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff." An ETF like DBA has to sell its futures contracts before expiration (storage is generally not an option) and buy new contracts at a higher price even though the value of the commodity itself hasn't changed. The loss of money suffered by these funds due to rolling over futures contracts is problematic. What to do?
The United States Commodity Index Fund (USCI) is a newer ETF that attempts to mitigate the contango problem by usng longer term futures contracts and avoiding commodities in contango. Ron Roland writes about the steps taken by USCI's developers to improve performance. I hope they're successful.
Another option is to skip the commodity ETF entirely and instead buy an ETF holding businesses related to the commodity. MOO, which we also own, is an ETF that invest in companies related to agriculture. Here's a chart courtesy of etfreplay.com comparing the total returns of MOO and DBA for the past year. Interestingly, despite month to month variations, in the end the two wind up at nearly the same place. I wouldn't think this is necessarily the norm.
Last option-- keep these commodity ETFs on a short leash so contango doesn't bite you.
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