Buy This Commodity ETF Before Prices Rise

Commodities have been in a downtrend since 2011. All commodities are priced in U.S. dollars, and a strong dollar has acted as a headwind.

But when a sector is out of favor, that's often the best time to get in on it. And a commodity ETF is a great option here.

Signs right now point to a possible bottom and reversal in commodities. Here's a look at where commodities prices are headed, plus a commodity ETF to buy to profit from the sector's rebound...

CRB Index Points to Rising Commodities Prices

One of the most widely followed commodities indexes is the Thomson Reuters/Jefferies Commodity Research Bureau (CRB) Index. Let's look at the index's performance in recent years.

As the chart below shows, CRB has fallen roughly 34% in the last four years.

commodity ETFWhat looks like a capitulation sell-off began in December 2014 and continued into late January. Then the CRB Index hit a double bottom in mid-March.

But today, the outlook is much different. As the U.S. dollar has weakened, the CRB has staged a rally.

To get in on that rally, here's a commodity ETF to buy...

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A Unique Commodity ETF to Play the Sector's Rebound

For a low-risk way to play the broad commodities sector, consider the U.S. Commodity Index Fund (NYSE Arca: USCI). This commodity ETF offers an alternative to the Jefferies CRB Global Commodity ETF (NYSE Arca: CRBQ), which tracks the index bearing the same name.

USCI tracks the SummerHaven Dynamic Commodity Index, which looks for "opportunities" in commodity prices. Here's what that means...

The index buys the seven commodities that exhibit the greatest "backwardation." In other words, it buys futures contracts that sell for less than the current month's contract. Then it buys the next seven commodities with the strongest 12-month price change.

commodity ETF graph
Click to enlarge

From mid-2010 until the start of 2015, USCI consistently outperformed the CRB. Then the CRB was the better option as USCI went sideways until just recently.

But thanks to the way USCI is structured, it should soon return to its position as leader and outperform a regular commodity benchmark like the CRB.

Click to enlarge
Click to enlarge

As the graph above shows, USCI has been in a climbing pattern since mid-March, when it bottomed at $44.71. In late April it easily took out the 50-day moving average.

Today (Thursday) USCI is trading at $47.34. Look for USCI to surpass the $47.50 level soon.

After that, the next target is $50. Following that, I expect it to rise all the way up to the $54 level later this year.

To reduce risk and maximize profit with the USCI commodity ETF, I suggest a hard stop at the recent low of $44.71 on a closing basis and a further trailing stop of 15%.

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