New Vanguard Commodities Fund?

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AspireToRetire
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New Vanguard Commodities Fund?

Post by AspireToRetire »

Dear Bogleheads,

I was curious what your thoughts are on Vanguard’s new commodities fund (VCMDX):

https://investor.vanguard.com/mutual-fu ... olio/vcmdx

It has a low expense ratio for a commodities fund (0.20%). My IPS allows up to 5% in precious metals/commodities and beyond a certain point it’s not practical to keep hoarding physical gold & silver. Also with the current global uncertainties and ballooning of government debt through the pandemic I worry about future inflation. Hence the appeal of this fund to me which seems like additional diversification to a typical stock/bond portfolio.

But my reservations are that it’s actively managed and based on commodities derivatives. I’m remembering what happened to oil markets earlier this year when the whole futures trading system failed. So I question whether an entire commodities fund based on futures contracts would survive to serve its purpose in a potential hyperinflation environment.

Any thoughts?

Many thanks,
AspireToRetire
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Re: New Vanguard Commodities Fund?

Post by mokaThought »

If it’s anything like how IAUF (iShares gold futures meant to track the price of gold without the tax complications) tracks IAU (iShares Gold Trust), it wouldn’t make sense to me even if I did want commodities in my portfolio.
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Re: New Vanguard Commodities Fund?

Post by abuss368 »

When I first moved back to Vanguard a long long time ago I had selected 15 - 18 funds. One of them was the Precious Metals & Mining fund. I then realized this was speculation and sold it. Own Total Market index funds and increase your savings each year. Nothing else matters.
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Re: New Vanguard Commodities Fund?

Post by retired@50 »

AspireToRetire wrote: Sat Oct 31, 2020 9:42 pm
Any thoughts?

Many thanks,
AspireToRetire
Based on the reading I've done, commodities don't work well for a buy and hold investor. It seems you have to get in and get out at the proper times.

See wiki page for a bit more: https://www.bogleheads.org/wiki/Commodities

Regards,
This is one person's opinion. Nothing more.
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Re: New Vanguard Commodities Fund?

Post by unbiased »

I dumped $10K into a long-only commodities fund back in 2006 for the "diversification" benefits.

It diversified alright -- it's still down 40% while the rest of my portfolio has an annualized 10%+ per year overall. Yeah. Financial crises will do that.

With the volatility, I would only invest in a long/short commodities fund that can take advantage of different market conditions. Unfortunately, such funds are very expensive and whether their expenses leave anything on the table for long-term investment gains is suspect. I have an even smaller position in LCSAX which is one of the few actively managed funds that know what they're doing in this space. They did fine this year and even went up during the oil crash thanks to short positions. BUT, I'm still not sold on this strategy and am only testing it out given the lack of long term treasuries as a good portfolio diversifier at the present time.
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Re: New Vanguard Commodities Fund?

Post by AspireToRetire »

unbiased wrote: Sat Oct 31, 2020 11:01 pm I dumped $10K into a long-only commodities fund back in 2006 for the "diversification" benefits.

It diversified alright -- it's still down 40% while the rest of my portfolio has an annualized 10%+ per year overall. Yeah. Financial crises will do that.

With the volatility, I would only invest in a long/short commodities fund that can take advantage of different market conditions. Unfortunately, such funds are very expensive and whether their expenses leave anything on the table for long-term investment gains is suspect. I have an even smaller position in LCSAX which is one of the few actively managed funds that know what they're doing in this space. They did fine this year and even went up during the oil crash thanks to short positions. BUT, I'm still not sold on this strategy and am only testing it out given the lack of long term treasuries as a good portfolio diversifier at the present time.
Thank you for your insight!
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Re: New Vanguard Commodities Fund?

Post by 000 »

Why not use a Gold and/or Silver ETF to round out your allocation?
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Re: New Vanguard Commodities Fund?

Post by AspireToRetire »

000 wrote: Sat Oct 31, 2020 11:35 pm Why not use a Gold and/or Silver ETF to round out your allocation?
Vanguard doesn’t have a gold/silver ETF that I know of. Its “precious metals” fund is not even a precious metals fund. It’s only 25% companies that are in the precious metals industry or in mining. All the other gold ETFs have expense ratios the same or higher than 0.20%. And almost all of them are based on gold futures as opposed to buying physical gold.

Those are some of the reasons I haven’t bought gold ETFs so far.
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Re: New Vanguard Commodities Fund?

Post by xenial »

AspireToRetire wrote: Sat Oct 31, 2020 11:46 pm Vanguard doesn’t have a gold/silver ETF that I know of. Its “precious metals” fund is not even a precious metals fund. It’s only 25% companies that are in the precious metals industry or in mining. All the other gold ETFs have expense ratios the same or higher than 0.20%. And almost all of them are based on gold futures as opposed to buying physical gold.
SGOL, BAR, GLDM, and AAAU all invest in physical gold and have expense ratios of 17-18 bp.
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Re: New Vanguard Commodities Fund?

Post by nisiprius »

Almost nothing invests directly in commodities, except some gold and silver exchange-traded products. And by the way if you read the prospectus you'll find out that they are not ETFs and that with GLD
Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940, as amended, or the protections afforded by the Commodity Exchange Act.
The problem with commodities is that there is always a "risk" that you will need to take physical delivery of the commodity itself.

Most "commodities" funds and ETFs are really investments in "collateralized commodity futures," CCFs. That means that you need to understand futures or you will be like the investors who bought "oil" ETFs in 2010 because they were sure oil prices would go up, and oil prices did go up, but their "oil" ETFs went down.

Commodities are controversial because a highly influential paper published in 2006 convinced a lot of people that commodities belong in general-purpose retirement savings portfolios. Fidelity put a 10% allocation in their flagship target-date Freedom Funds for a number of years, and then dropped it. Vanguard has never (yet) included them in their target-date or LifeStrategy funds.

The reason they are controversial is because of what has happened since they become widely accepted and suddenly "financialized" in the form of mutual funds and ETFs. This is what one of the oldest, biggest, and most-commonly-suggested commodities fund, PCRIX, and an index that tracks the same asset class, have done. The fact that they crashed right along with stocks during 2008-2009 was not what people had been led to expect.

Source

Image

The question of whether or not you want to include "commodities" (collateralized commodity futures) in your portfolio is a far more important decision than which commodities fund to choose.

As for VCMDX, I would have to evaluate the managers of VCMDX and I personally wouldn't even know how to begin to do this. I do see that Morningstar has an "analyst rating" so if you're willing to get a paid subscription you can at least find out what they think about it. Normally it doesn't seem wise to go with something that new, being first kid on the block is not a good investment strategy (in my arrogant opinion.)

Beyond that, what can you say except that VCMDX (blue) has only been out for a very short time... and in that time it has lost less money than Morningstar's category average (orange), Morningstar's chosen index (green), the PCRIX fund I mentioned earlier (yellow), and much less than an "ETF"-which-isn't-an-ETF which tries to track the S&P GSCI index (maroon).

Source

Image
Last edited by nisiprius on Sun Nov 01, 2020 11:24 am, edited 1 time in total.
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Re: New Vanguard Commodities Fund?

Post by AspireToRetire »

nisiprius wrote: Sun Nov 01, 2020 7:50 am Almost nothing invests directly in commodities, except some gold and silver exchange-traded products. And by the way if you read the prospectus you'll find out that they are not ETFs and that with GLD
Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940, as amended, or the protections afforded by the Commodity Exchange Act.
The problem with commodities is that there is always a "risk" that you will need to take physical delivery of the commodity itself.

Most "commodities" funds and ETFs are really investments in "collateralized commodity futures," CCFs. That means that you need to understand futures or you will be like the investors who bought "oil" ETFs in 2010 because they were sure oil prices would go up, and oil prices did go up, but their "oil" ETFs went down.

Commodities are controversial because a highly influential paper published in 2006 convinced a lot of people that commodities belong in general-purpose retirement savings portfolios. Fidelity put a 10% allocation in their flagship target-date Freedom Funds for a number of years, and then dropped it. Vanguard has never (yet) included them in their target-date or LifeStrategy funds.

The reason they are controversial is basically, that they have done this. This is what one of the oldest, biggest, and most-commonly-suggested commodities fund, PCRIX, and an index that tracks the same asset class, have done. The fact that they crashed right along with stocks during 2008-2009 was not what people had been led to expect.

Source

Image

The question of whether or not you want to include "commodities" (collateralized commodity futures) in your portfolio is a far more important decision than which commodities fund to choose.

As for VCMDX, I would have to evaluate the managers of VCMDX and I personally wouldn't even know how to begin to do this. I do see that Morningstar has an "analyst rating" so if you're willing to get a paid subscription you can at least find out what they think about it. Normally it doesn't seem wise to go with something that new, being first kid on the block is not a good investment strategy (in my arrogant opinion.)

Beyond that, what can you say except that VCMDX (blue) has only been out for a very short time... and in that time it has lost less money than Morningstar's category average (orange), Morningstar's chosen index (green), the PCRIX fund I mentioned earlier (yellow), and much less than an "ETF"-which-isn't-an-ETF which tries to track the S&P GSCI index (maroon).

Source

Image
Wow thank you so much Nisiprius. I’m even less certain about what to do now but that’s a testament to the depth of your post. Thank you. I think I need to sleep on this a little more.
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Re: New Vanguard Commodities Fund?

Post by Robot Monster »

I have a tiny allocation to that fund, myself, and have trepidation about adding more simply because commodities are outside the mainstream of what is generally recommended for a portfolio. That said, you may find the information below useful, and it is what gave me the confidence to invest the small amount in commodities that I did.

During a high inflationary period from 1970-1979, average compounded real returns (US$):

Global market portfolio-----1.65%
Equities broad---------------0.33%
Real estate----------------5.10%
Nongovernment bonds-----2.04%
Government bonds broad--1.72%
Commodities----------------22.02%
Source

Which was embedded in the paper, Historical Returns of the Market Portfolio

***

A graph showing how commodities performed from '68 to '80, where commodity prices were $97.7 in 1968 and $330 in 1980...A CPI calculator says $97.7 (1968) turns into an inflation adjusted $222.90 in 1980 dollars.

Image

***

Vanguard research paper called From reflation to inflation: What's the tipping point for portfolios?

Page five of the PDF will show you ideal portfolios for varying inflationary environments. You might be surprised to see a couple of them have 30% allocations to commodities.

***

For Wall Street Journal subscribers, an article about commodities by Jason Zweig.

Includes a graph of historical performance compared to stocks.

***

From a 9/16/2020 Bloomberg article:
It’s probably a good time to invest in commodities now when prices are lower, according to former Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein. 'From an inflation point of view, as an investor, I think investing in material sectors while they’re under-appreciated is not a bad thing now.' Blankfein...however...said he’s unclear if it’s a good idea to invest in gold and silver 'because it’s been so long since those metals played a role as a store of value.'
Source
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Re: New Vanguard Commodities Fund?

Post by AspireToRetire »

Robot Monster wrote: Sun Nov 01, 2020 10:27 am I have a tiny allocation to that fund, myself, and have trepidation about adding more simply because commodities are outside the mainstream of what is generally recommended for a portfolio. That said, you may find the information below useful, and it is what gave me the confidence to invest the small amount in commodities that I did.

During a high inflationary period from 1970-1979, average compounded real returns (US$):

Global market portfolio-----1.65%
Equities broad---------------0.33%
Real estate----------------5.10%
Nongovernment bonds-----2.04%
Government bonds broad--1.72%
Commodities----------------22.02%
Source

Which was embedded in the paper, Historical Returns of the Market Portfolio

***

A graph showing how commodities performed from '68 to '80, where commodity prices were $97.7 in 1968 and $330 in 1980...A CPI calculator says $97.7 (1968) turns into an inflation adjusted $222.90 in 1980 dollars.

Image

***

Vanguard research paper called From reflation to inflation: What's the tipping point for portfolios?

Page five of the PDF will show you ideal portfolios for varying inflationary environments. You might be surprised to see a couple of them have 30% allocations to commodities.

***

For Wall Street Journal subscribers, an article about commodities by Jason Zweig.

Includes a graph of historical performance compared to stocks.

***

From a 9/16/2020 Bloomberg article:
It’s probably a good time to invest in commodities now when prices are lower, according to former Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein. 'From an inflation point of view, as an investor, I think investing in material sectors while they’re under-appreciated is not a bad thing now.' Blankfein...however...said he’s unclear if it’s a good idea to invest in gold and silver 'because it’s been so long since those metals played a role as a store of value.'
Source
Robot monster,

That’s incredibly helpful.

Do you think a commodities derivatives fund like this one would have been able to mirror that 22% gain if it existed during the 1970s inflationary period? Many examples of commodities ETFs failing to mirror actual commodities prices. :confused
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Re: New Vanguard Commodities Fund?

Post by Robot Monster »

AspireToRetire wrote: Sun Nov 01, 2020 10:36 am Do you think a commodities derivatives fund like this one would have been able to mirror that 22% gain if it existed during the 1970s inflationary period? Many examples of commodities ETFs failing to mirror actual commodities prices. :confused
Unfortunately, I have no idea. Most of my inflation protect I choose to take in the form of TIPS, I should mention.

Edit: I did find an article entitled, "Snake oil: Why the $3 billion USO ETF is down this year even as crude has surged". link
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Re: New Vanguard Commodities Fund?

Post by 000 »

xenial wrote: Sun Nov 01, 2020 12:21 am
AspireToRetire wrote: Sat Oct 31, 2020 11:46 pm Vanguard doesn’t have a gold/silver ETF that I know of. Its “precious metals” fund is not even a precious metals fund. It’s only 25% companies that are in the precious metals industry or in mining. All the other gold ETFs have expense ratios the same or higher than 0.20%. And almost all of them are based on gold futures as opposed to buying physical gold.
SGOL, BAR, GLDM, and AAAU all invest in physical gold and have expense ratios of 17-18 bp.
I agree, note that AAAU is being acquired by Goldman Sachs though, and I would also prefer SGOL/BAR to GLDM.
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Re: New Vanguard Commodities Fund?

Post by 000 »

AspireToRetire wrote: Sat Oct 31, 2020 11:46 pm
000 wrote: Sat Oct 31, 2020 11:35 pm Why not use a Gold and/or Silver ETF to round out your allocation?
Vanguard doesn’t have a gold/silver ETF that I know of. Its “precious metals” fund is not even a precious metals fund. It’s only 25% companies that are in the precious metals industry or in mining. All the other gold ETFs have expense ratios the same or higher than 0.20%. And almost all of them are based on gold futures as opposed to buying physical gold.

Those are some of the reasons I haven’t bought gold ETFs so far.
As xenial noted above, there are several gold ETFs with ER < 0.20% holding physical hold. SGOL is one.
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Re: New Vanguard Commodities Fund?

Post by joe8d »

abuss368 wrote: Sat Oct 31, 2020 10:14 pm When I first moved back to Vanguard a long long time ago I had selected 15 - 18 funds. One of them was the Precious Metals & Mining fund. I then realized this was speculation and sold it. Own Total Market index funds and increase your savings each year. Nothing else matters.
:thumbsup
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Re: New Vanguard Commodities Fund?

Post by TonyDAntonio »

Robot Monster wrote: Sun Nov 01, 2020 10:27 am I have a tiny allocation to that fund, myself, and have trepidation about adding more simply because commodities are outside the mainstream of what is generally recommended for a portfolio. That said, you may find the information below useful, and it is what gave me the confidence to invest the small amount in commodities that I did.

During a high inflationary period from 1970-1979, average compounded real returns (US$):

Global market portfolio-----1.65%
Equities broad---------------0.33%
Real estate----------------5.10%
Nongovernment bonds-----2.04%
Government bonds broad--1.72%
Commodities----------------22.02%
Source

Which was embedded in the paper, Historical Returns of the Market Portfolio

***

A graph showing how commodities performed from '68 to '80, where commodity prices were $97.7 in 1968 and $330 in 1980...A CPI calculator says $97.7 (1968) turns into an inflation adjusted $222.90 in 1980 dollars.

Image

***

Vanguard research paper called From reflation to inflation: What's the tipping point for portfolios?

Page five of the PDF will show you ideal portfolios for varying inflationary environments. You might be surprised to see a couple of them have 30% allocations to commodities.

***

For Wall Street Journal subscribers, an article about commodities by Jason Zweig.

Includes a graph of historical performance compared to stocks.

***

From a 9/16/2020 Bloomberg article:
It’s probably a good time to invest in commodities now when prices are lower, according to former Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein. 'From an inflation point of view, as an investor, I think investing in material sectors while they’re under-appreciated is not a bad thing now.' Blankfein...however...said he’s unclear if it’s a good idea to invest in gold and silver 'because it’s been so long since those metals played a role as a store of value.'
Source

Sorry I'm so late responding to this thread. I was doing some PCRIX searches and found it. My response is triggered by the reference to Lloyd Blankfein. I promised myself that I would never let a chance to bash (ok, comment on) him after watching him smugly explain during a congressional hearing why it was perfectly reasonable for Goldman Sachs to actively promote (sell) to customers products that their firm was betting against. I have since never trusted a word uttered by him. And I realize he is probably not the only CEO and Goldman not the only company that does this. Disgusting.
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Re: New Vanguard Commodities Fund?

Post by roth evangelist »

It's a shame this isn't an ETF. $50,000 is a pretty steep barrier to investing. I'd consider putting a little bit of money into it.
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Re: New Vanguard Commodities Fund?

Post by Norsky19 »

roth evangelist wrote: Fri May 14, 2021 12:05 am It's a shame this isn't an ETF. $50,000 is a pretty steep barrier to investing. I'd consider putting a little bit of money into it.
Maybe VAW as an alternative?
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Re: New Vanguard Commodities Fund?

Post by roth evangelist »

Norsky19 wrote: Fri May 14, 2021 4:14 am
roth evangelist wrote: Fri May 14, 2021 12:05 am It's a shame this isn't an ETF. $50,000 is a pretty steep barrier to investing. I'd consider putting a little bit of money into it.
Maybe VAW as an alternative?
I've thought about it. But I kinda don't like how it's a sector stock fund rather than more directly investing in commodities. Honestly I'm not well versed in the differences there.
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