Broad commodity investing with iShares CMDY ETF
Broad commodity investing with iShares CMDY ETF
Background -
Three of the most significant broad, diversified commodity ETFs are USCI, PDBC, and GSG:
https://etfdb.com/etf/PDBC/#etf-ticker-profile
https://etfdb.com/etf/USCI/#etf-ticker-profile
https://etfdb.com/etf/GSG/#etf-ticker-profile
USCI rebalances monthly based in part on contango and backwardation, while PDBC and GSG are less active in their management. USCI also has a balanced portfolio while PDBC and GSG skew heavy on oil and gas. I was considering USCI, but wondering if there was a 1099 tax form alternative. After diving into the list of iShares offerings, enter the CMDY ETF:
https://www.ishares.com/us/products/292 ... y-etf-fund
CMDY appears to be the iShares answer to both USCI, as it has a balanced portfolio and adjusts monthly based on contango/backwardation, and also PDBC as it is a 1099 tax form instead of a K-1. You can get some info on the index it tracks here:
https://data.bloomberglp.com/indices/si ... lement.pdf
or here
https://data.bloomberglp.com/profession ... heet-2.pdf
One issue with CMDY is that its AUM and daily trading volume are low (compared to other "big" ETFs). So you'd need to be careful and sure to use limit orders. But it does trade very close to its NAV. Its performance YTD is much better than either USCI or PDBC and its ER is very low (compared to others in its class). Since 5/1/2020, CMDY has easily outperformed the S&P 500 (as has PDBC and USCI, but USCI to a lesser extent).
Investment idea -
In case of inflation, commodity prices are expected to jump. While it's very easy to get exposure to gold as a hedge (GLD or IAU ETFs, or many others), getting broad exposure in a well-designed instrument seems much more hard to come by. I'm considering making a ~10% allocation to CMDY in my IRA for perhaps the rest of 2020, as a lower volatility investment that also hedges against inflation, and I am assuming that gold prices are
a leading indicator the inflationary pack. Obviously, commodities are not a LONG term hold compared to stocks. I'm not saying that. Just a short/mid-term hold given a possible inflationary or stagflation near-term economic environment.
Has anyone else considered adding to commodity ETFs this summer? What do you all think of CMDY?
Three of the most significant broad, diversified commodity ETFs are USCI, PDBC, and GSG:
https://etfdb.com/etf/PDBC/#etf-ticker-profile
https://etfdb.com/etf/USCI/#etf-ticker-profile
https://etfdb.com/etf/GSG/#etf-ticker-profile
USCI rebalances monthly based in part on contango and backwardation, while PDBC and GSG are less active in their management. USCI also has a balanced portfolio while PDBC and GSG skew heavy on oil and gas. I was considering USCI, but wondering if there was a 1099 tax form alternative. After diving into the list of iShares offerings, enter the CMDY ETF:
https://www.ishares.com/us/products/292 ... y-etf-fund
CMDY appears to be the iShares answer to both USCI, as it has a balanced portfolio and adjusts monthly based on contango/backwardation, and also PDBC as it is a 1099 tax form instead of a K-1. You can get some info on the index it tracks here:
https://data.bloomberglp.com/indices/si ... lement.pdf
or here
https://data.bloomberglp.com/profession ... heet-2.pdf
One issue with CMDY is that its AUM and daily trading volume are low (compared to other "big" ETFs). So you'd need to be careful and sure to use limit orders. But it does trade very close to its NAV. Its performance YTD is much better than either USCI or PDBC and its ER is very low (compared to others in its class). Since 5/1/2020, CMDY has easily outperformed the S&P 500 (as has PDBC and USCI, but USCI to a lesser extent).
Investment idea -
In case of inflation, commodity prices are expected to jump. While it's very easy to get exposure to gold as a hedge (GLD or IAU ETFs, or many others), getting broad exposure in a well-designed instrument seems much more hard to come by. I'm considering making a ~10% allocation to CMDY in my IRA for perhaps the rest of 2020, as a lower volatility investment that also hedges against inflation, and I am assuming that gold prices are
a leading indicator the inflationary pack. Obviously, commodities are not a LONG term hold compared to stocks. I'm not saying that. Just a short/mid-term hold given a possible inflationary or stagflation near-term economic environment.
Has anyone else considered adding to commodity ETFs this summer? What do you all think of CMDY?
Re: Broad commodity investing with iShares CMDY ETF
I don't like these products because they have a lot of structural headwinds, and honestly I can't really offer much to your actual question. However, with the goal of seeking inflation-protection, and if you feel like you're simply taking the least bad option (out of a group of all bad ones), have you considered for this particular allocation going to an active mutual fund? Again, I'm not really the person to provide the best funds in that regard, but if I were considering this type of allocation in a non-taxable account, I'd probably consider starting by comparing to Pimco (who have a few inflation-protection funds, I believe), and whoever else is in that space. Curious if others know more here?chem wrote: ↑Thu Aug 06, 2020 9:34 am Background -
Three of the most significant broad, diversified commodity ETFs are USCI, PDBC, and GSG:
https://etfdb.com/etf/PDBC/#etf-ticker-profile
https://etfdb.com/etf/USCI/#etf-ticker-profile
https://etfdb.com/etf/GSG/#etf-ticker-profile
USCI rebalances monthly based in part on contango and backwardation, while PDBC and GSG are less active in their management. USCI also has a balanced portfolio while PDBC and GSG skew heavy on oil and gas. I was considering USCI, but wondering if there was a 1099 tax form alternative. After diving into the list of iShares offerings, enter the CMDY ETF:
https://www.ishares.com/us/products/292 ... y-etf-fund
CMDY appears to be the iShares answer to both USCI, as it has a balanced portfolio and adjusts monthly based on contango/backwardation, and also PDBC as it is a 1099 tax form instead of a K-1. You can get some info on the index it tracks here:
https://data.bloomberglp.com/indices/si ... lement.pdf
or here
https://data.bloomberglp.com/profession ... heet-2.pdf
One issue with CMDY is that its AUM and daily trading volume are low (compared to other "big" ETFs). So you'd need to be careful and sure to use limit orders. But it does trade very close to its NAV. Its performance YTD is much better than either USCI or PDBC and its ER is very low (compared to others in its class). Since 5/1/2020, CMDY has easily outperformed the S&P 500 (as has PDBC and USCI, but USCI to a lesser extent).
Investment idea -
In case of inflation, commodity prices are expected to jump. While it's very easy to get exposure to gold as a hedge (GLD or IAU ETFs, or many others), getting broad exposure in a well-designed instrument seems much more hard to come by. I'm considering making a ~10% allocation to CMDY in my IRA for perhaps the rest of 2020, as a lower volatility investment that also hedges against inflation, and I am assuming that gold prices are
a leading indicator the inflationary pack. Obviously, commodities are not a LONG term hold compared to stocks. I'm not saying that. Just a short/mid-term hold given a possible inflationary or stagflation near-term economic environment.
Has anyone else considered adding to commodity ETFs this summer? What do you all think of CMDY?
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Re: Broad commodity investing with iShares CMDY ETF
Not interested in any commodity, ever. They don’t do anything. I invest in companies, governments - people. If I were worried about inflation (I’m not) I’d get some TIPs.
Re: Broad commodity investing with iShares CMDY ETF
Impressive. You found a way to contribute even less to his topic than I didImpatience wrote: ↑Thu Aug 06, 2020 10:19 am Not interested in any commodity, ever. They don’t do anything. I invest in companies, governments - people. If I were worried about inflation (I’m not) I’d get some TIPs.
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Re: Broad commodity investing with iShares CMDY ETF
Usually when I start typing a response like that I just back out but I guess I was determined to see it through this morningBJJ_GUY wrote: ↑Thu Aug 06, 2020 10:36 amImpressive. You found a way to contribute even less to his topic than I didImpatience wrote: ↑Thu Aug 06, 2020 10:19 am Not interested in any commodity, ever. They don’t do anything. I invest in companies, governments - people. If I were worried about inflation (I’m not) I’d get some TIPs.
Re: Broad commodity investing with iShares CMDY ETF
I understand that TIPS exist, but, they have negative nominal yields at the moment and all the commodity ETFs that I mentioned have wildly outperformed TIPS bonds (e.g. VTIP or SCHP ETFs) since April. Not really looking to turn this into a TIPS discussion, but they are certainly a reasonable idea for part of a portfolio. This thread, about commodities, is more akin to other threads discussing investment in gold or oil instruments.
As I alluded to in the OP, I would not use commodities for a multi-decade buy-and-hold. But 2020 is an unusual year. So I'm trying to discuss commodity investing theory and commodity ETFs in a time of great risk for both the market and inflation. I suspect the Sharpe ratio of CMDY may greatly exceed that of SPY (or VOO) for the rest of 2020. Its total return might too -- it's certainly on track to do that since April or May.
If anyone's wanting to see more details about CMDY's actual commodity holdings in the annual report (from last year so a bit outdated, but on pdf page 5):
https://www.ishares.com/us/library/stre ... -10-31.pdf
or this simple and pretty fact sheet:
https://www.ishares.com/us/literature/p ... -en-us.pdf
As I alluded to in the OP, I would not use commodities for a multi-decade buy-and-hold. But 2020 is an unusual year. So I'm trying to discuss commodity investing theory and commodity ETFs in a time of great risk for both the market and inflation. I suspect the Sharpe ratio of CMDY may greatly exceed that of SPY (or VOO) for the rest of 2020. Its total return might too -- it's certainly on track to do that since April or May.
If anyone's wanting to see more details about CMDY's actual commodity holdings in the annual report (from last year so a bit outdated, but on pdf page 5):
https://www.ishares.com/us/library/stre ... -10-31.pdf
or this simple and pretty fact sheet:
https://www.ishares.com/us/literature/p ... -en-us.pdf
Re: Broad commodity investing with iShares CMDY ETF
Haha. Well, I did find it interesting that you've found a way to invest in governments. That's a new one!Impatience wrote: ↑Thu Aug 06, 2020 10:41 amUsually when I start typing a response like that I just back out but I guess I was determined to see it through this morningBJJ_GUY wrote: ↑Thu Aug 06, 2020 10:36 amImpressive. You found a way to contribute even less to his topic than I didImpatience wrote: ↑Thu Aug 06, 2020 10:19 am Not interested in any commodity, ever. They don’t do anything. I invest in companies, governments - people. If I were worried about inflation (I’m not) I’d get some TIPs.
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Re: Broad commodity investing with iShares CMDY ETF
Oh I was just referring to treasury and municipal bonds.BJJ_GUY wrote: ↑Thu Aug 06, 2020 10:47 amHaha. Well, I did find it interesting that you've found a way to invest in governments. That's a new one!Impatience wrote: ↑Thu Aug 06, 2020 10:41 amUsually when I start typing a response like that I just back out but I guess I was determined to see it through this morningBJJ_GUY wrote: ↑Thu Aug 06, 2020 10:36 amImpressive. You found a way to contribute even less to his topic than I didImpatience wrote: ↑Thu Aug 06, 2020 10:19 am Not interested in any commodity, ever. They don’t do anything. I invest in companies, governments - people. If I were worried about inflation (I’m not) I’d get some TIPs.
Re: Broad commodity investing with iShares CMDY ETF
I wouldn't make portfolio changes based on current conditions, expectations, or concerns. If you want to include commodities, I would do so as a long-term structural change to your portfolio.
https://investornews.vanguard/discoveri ... dity-fund/
https://investor.vanguard.com/mutual-fu ... file/VCMDX
https://advisors.vanguard.com/iwe/pdf/ISGCTIPS.pdf
https://investornews.vanguard/discoveri ... dity-fund/
https://investor.vanguard.com/mutual-fu ... file/VCMDX
https://advisors.vanguard.com/iwe/pdf/ISGCTIPS.pdf
Last edited by apex84 on Thu Aug 06, 2020 12:02 pm, edited 1 time in total.
Re: Broad commodity investing with iShares CMDY ETF
I only like gold & silver ETFs, commodity ETFs are junk due to contango & the like. CTA approach might be a busted flush too. A precious metals ETF, the product is there in a vault, no monkeying about rolling contracts. Energy producer & PM miners ETFs might be a good inflation / commodity play also.
Amateur Self-Taught Senior Macro Strategist
Re: Broad commodity investing with iShares CMDY ETF
You mention gold as a leading indicator, but this etf doesn't seem to have gold as its largest holding. So, I'm not following the idea that it might hedge against inflation over the next 4+ months. Have you considered that the fund performance isn't as a result of tracking inflation? Has it instead benefited from a drop in the US dollar? (I didn't see an straight forward explanation on their methodology, but feel free to expand on how you see that hedging inflation over short term) .
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Re: Broad commodity investing with iShares CMDY ETF
I would choose a fund that invests in commodity companies over a commodity fund.
Their fortunes follow the price of commodities, they usually pay dividends, and you won't get pesky K1s.
The funds sometimes have lower expense ratios too.
FYI, swapped out GNR for GDX earlier this year. Amidst a global recession, I don't foresee an increase in demand for commodities.
Although, lumber prices have skyrocketed. Maybe due to supply chain issues, and less due to a massive boost in demand?
Their fortunes follow the price of commodities, they usually pay dividends, and you won't get pesky K1s.
The funds sometimes have lower expense ratios too.
FYI, swapped out GNR for GDX earlier this year. Amidst a global recession, I don't foresee an increase in demand for commodities.
Although, lumber prices have skyrocketed. Maybe due to supply chain issues, and less due to a massive boost in demand?
Re: Broad commodity investing with iShares CMDY ETF
PCRIX a commodities futures fund
June 28, 2002, $20 a share adjusted introductory price (2 to 1 share consolidation along the way, due to threat of its being delisted at its low price)
Eighteen years later, June 28, 2020, $5.05 a share.
Very much like a pacifier offered during the 2008 stock market crash, PCRIX was welcomed with gusto, but long term it was discovered to have no substance whatsoever. I was one of the long term holders.
June 28, 2002, $20 a share adjusted introductory price (2 to 1 share consolidation along the way, due to threat of its being delisted at its low price)
Eighteen years later, June 28, 2020, $5.05 a share.
Very much like a pacifier offered during the 2008 stock market crash, PCRIX was welcomed with gusto, but long term it was discovered to have no substance whatsoever. I was one of the long term holders.
Re: Broad commodity investing with iShares CMDY ETF
PIRMX was the one I was thinking of. I don't know much about it, but a quick look, it seems to attempt to offer a one-stop shop to various assets often discussed as being inflation-sensitive. There is also an active TIPS fund I saw when I went to the site.heyyou wrote: ↑Thu Aug 06, 2020 12:33 pm PCRIX a commodities futures fund
June 28, 2002, $20 a share adjusted introductory price (2 to 1 share consolidation along the way, due to threat of its being delisted at its low price)
Eighteen years later, June 28, 2020, $5.05 a share.
Very much like a pacifier offered during the 2008 stock market crash, PCRIX was welcomed with gusto, but long term it was discovered to have no substance whatsoever. I was one of the long term holders.
It's not surprising that PCRIX (commodity fund) can't make money. Not only is the strategy behind the commodity indices flawed (and structurally challenged even more now), but I remember in the mid-2000s I want to say, there was an SEC or IRS ruling that made it impossible for active funds to effectively manage a strategy using commodity index strategies in the mutual fund structure. I believe pimco and others had Cayman domiciled master trading vehicles through which they traded commodity futures swaps (details may be off, but I think this is right). Even if they were still able to trade the way the fund was initially set up to do, they may be in the same place.
Re: Broad commodity investing with iShares CMDY ETF
Great links, thanks. Vanguard's VCMDX also tracks a broad-basket commodity index, but, its returns have significantly trailed CMDY year-to-date (likely due to CMDY's roll strategy -- see their fact sheet for comparison to the standard index similar to what VCMDX tracks).apex84 wrote: ↑Thu Aug 06, 2020 11:55 am I wouldn't make portfolio changes based on current conditions, expectations, or concerns. If you want to include commodities, I would do so as a long-term structural change to your portfolio.
https://investornews.vanguard/discoveri ... dity-fund/
https://investor.vanguard.com/mutual-fu ... file/VCMDX
https://advisors.vanguard.com/iwe/pdf/ISGCTIPS.pdf
As Vanguard's Chism says in the first link,
What Chism says aligns with exactly my situation. I want further diversification, and have a real concern about inflation. If either of those things change for me, I would close my position in commodities. I searched Vanguard's general listing but didn't see their VCMDX fund -- this only strengthens my idea that investing in a commodity basket may have merit in certain situations."Frank Chism: It’s not. It’s an interesting thing for Vanguard. Normally, I think, when you look at the history of our product development and what we’ve launched, we tend to launch things that we would argue are good for just about everybody.
And this is not the kind of investment where we’re going to pound the table and say, “Everyone should have X percentage of commodity holdings in their portfolio.” This is a product that’s designed for sophisticated investors who want further diversification beyond stocks, bonds, and cash. Stocks and bonds tend to be uncorrelated. However, if you have a meaningful amount of money, or you have a near-term spending need, it can help to have an additional diversification benefit. And then, two, this is really geared for folks who have a real concern about inflation.
So it’s really not for everyone. It is going to be for folks who meet either of those criteria: “I want a lot more diversification, or I have a real concern about inflation.”
As I mentioned in the OP, CMDY gives a 1099, not a K-1. That's one of its selling points.unclescrooge wrote: ↑Thu Aug 06, 2020 12:08 pm I would choose a fund that invests in commodity companies over a commodity fund.
Their fortunes follow the price of commodities, they usually pay dividends, and you won't get pesky K1s.
Re: Broad commodity investing with iShares CMDY ETF
OP,
Why not just go with funds that invest in the stocks of commodity producers? Those funds have more data backing up their use as a short to medium term inflation hedge. Unfortunately, most of the commodity ETFs utilize futures, which have the issues of contango that have been thoroughly discussed here. If you haven't dug through the old posts about contango, I'd encourage you to read the one with a back and forth between Larry Swedroe and Rick Ferri (IIRC even Bill Bernstein chimed in, so plenty of good insights from several Boglehead authors).
You can buy a gold miners ETF, energy producers ETFs, or other base material ETFs for a low ER and probably will do much better hedging against a short to medium term inflation spike. I personally use FILL (global energy ETF) and GDX/SLVP ( global gold and silver mining ETFs). I specifically avoid anything with futures because of the issues with contango. I guess it's possible if you get a situation of backwardation during a time of inflation they will work well, but if they are in contango during that time it might reduce or eliminate any benefit you are trying to get. At least with the stocks of the producers the issue of backwardation/contango is eliminated.
Why not just go with funds that invest in the stocks of commodity producers? Those funds have more data backing up their use as a short to medium term inflation hedge. Unfortunately, most of the commodity ETFs utilize futures, which have the issues of contango that have been thoroughly discussed here. If you haven't dug through the old posts about contango, I'd encourage you to read the one with a back and forth between Larry Swedroe and Rick Ferri (IIRC even Bill Bernstein chimed in, so plenty of good insights from several Boglehead authors).
You can buy a gold miners ETF, energy producers ETFs, or other base material ETFs for a low ER and probably will do much better hedging against a short to medium term inflation spike. I personally use FILL (global energy ETF) and GDX/SLVP ( global gold and silver mining ETFs). I specifically avoid anything with futures because of the issues with contango. I guess it's possible if you get a situation of backwardation during a time of inflation they will work well, but if they are in contango during that time it might reduce or eliminate any benefit you are trying to get. At least with the stocks of the producers the issue of backwardation/contango is eliminated.
Last edited by asif408 on Thu Aug 06, 2020 1:41 pm, edited 2 times in total.
Re: Broad commodity investing with iShares CMDY ETF
That's a reasonable option, but, I wanted balanced one-stop shopping for all commodities including agriculture.asif408 wrote: ↑Thu Aug 06, 2020 1:35 pm OP,
Why not just go with funds that invest in the stocks of commodity producers? Those funds have more data backing up their use as a short to medium term inflation hedge. Unfortunately, most of the commodity ETFs utilize futures, which have the issues of contango that have been thoroughly discussed here. If you haven't dug through the old posts about contango, I'd encourage you to read the one with a back and forth between Larry Swedroe and Rick Ferri (IIRC even Bill Bernstein chimed in, so plenty of good insights from several Boglehead authors).
You can buy a gold miners ETF, energy producers ETFs, or other base material ETFs for a low ER and probably will do much better hedging against a short to medium term inflation spike. I personally use FILL (global energy ETF) and GDX/SLVP ( global gold and silver mining ETFs). I specifically avoid anything with futures because of the issues with contango. I guess it's possible if you get a situation of backwardation during a time of inflation they will work well, but if they are in contango during that time it might reduce or eliminate any benefit you are trying to get. At least with the stocks of the producers the issue of backwardation/contango is eliminated.
Regarding contango, that's a MAJOR reason why I'm leaning toward the CMDY ETF. Check out the methodology here (from OP):
https://data.bloomberglp.com/indices/si ... lement.pdf
and fact sheet here (from later post):
https://www.ishares.com/us/literature/p ... -en-us.pdf
It's specifically designed to maximize exposure to backwardation and minimize exposure to contango across eligible futures contracts, addressing your contango concern. I suspect that's part of the reason why it's strongly outperforming other commodities funds this year.
Re: Broad commodity investing with iShares CMDY ETF
Call me skeptical for any fund that claims they can control for contango issues, since it is only known after the fact. They could be the first, but no fund as of yet has managed to control for it. Personally I'm not interested in being the guinea pig, but if you don't mind and are willing to accept that it may fail go for it.chem wrote: ↑Thu Aug 06, 2020 1:41 pm That's a reasonable option, but, I wanted balanced one-stop shopping for all commodities including agriculture.
Regarding contango, that's a MAJOR reason why I'm leaning toward the CMDY ETF. Check out the methodology here (from OP):
https://data.bloomberglp.com/indices/si ... lement.pdf
and fact sheet here (from later post):
https://www.ishares.com/us/literature/p ... -en-us.pdf
It's specifically designed to maximize exposure to backwardation and minimize exposure to contango across eligible futures contracts, addressing your contango concern. I suspect that's part of the reason why it's strongly outperforming other commodities funds this year.
Re: Broad commodity investing with iShares CMDY ETF
Well, USCI was first, but for the fund at hand, check out the chart on page 1 here (from OP):asif408 wrote: ↑Thu Aug 06, 2020 1:43 pmCall me skeptical for any fund that claims they can control for contango issues, since it is only known after the fact. They could be the first, but no fund as of yet has managed to control for it. Personally I'm not interested in being the guinea pig, but if you don't mind and are willing to accept that it may fail go for it.chem wrote: ↑Thu Aug 06, 2020 1:41 pm That's a reasonable option, but, I wanted balanced one-stop shopping for all commodities including agriculture.
Regarding contango, that's a MAJOR reason why I'm leaning toward the CMDY ETF. Check out the methodology here (from OP):
https://data.bloomberglp.com/indices/si ... lement.pdf
and fact sheet here (from later post):
https://www.ishares.com/us/literature/p ... -en-us.pdf
It's specifically designed to maximize exposure to backwardation and minimize exposure to contango across eligible futures contracts, addressing your contango concern. I suspect that's part of the reason why it's strongly outperforming other commodities funds this year.
https://data.bloomberglp.com/profession ... heet-2.pdf
It's a direct comparison since 2009 of the general BCOM commodity index vs. the contango-mitigating roll select index. At least in a backtest to 2009, it works as advertised. Not a magic bullet, obviously, since commodities can lose value (as can stocks). But the roll methodology seems to help.
Re: Broad commodity investing with iShares CMDY ETF
It's hard to test during an actual inflation spike, since most of the commodity funds haven't been around during an inflation spike, so I'll just look at the history available. At the amount your are suggesting (10%), doing some quick comparisons I see very little difference between what I am suggesting and your proposal. See, for example, the last year 2 years holding CMDY vs a combination of GDX/FILL added to a target date fund: https://www.portfoliovisualizer.com/bac ... ation4_2=5chem wrote: ↑Thu Aug 06, 2020 1:49 pmWell, USCI was first, but for the fund at hand, check out the chart on page 1 here (from OP):asif408 wrote: ↑Thu Aug 06, 2020 1:43 pmCall me skeptical for any fund that claims they can control for contango issues, since it is only known after the fact. They could be the first, but no fund as of yet has managed to control for it. Personally I'm not interested in being the guinea pig, but if you don't mind and are willing to accept that it may fail go for it.chem wrote: ↑Thu Aug 06, 2020 1:41 pm That's a reasonable option, but, I wanted balanced one-stop shopping for all commodities including agriculture.
Regarding contango, that's a MAJOR reason why I'm leaning toward the CMDY ETF. Check out the methodology here (from OP):
https://data.bloomberglp.com/indices/si ... lement.pdf
and fact sheet here (from later post):
https://www.ishares.com/us/literature/p ... -en-us.pdf
It's specifically designed to maximize exposure to backwardation and minimize exposure to contango across eligible futures contracts, addressing your contango concern. I suspect that's part of the reason why it's strongly outperforming other commodities funds this year.
https://data.bloomberglp.com/profession ... heet-2.pdf
It's a direct comparison since 2009 of the general BCOM commodity index vs. the contango-mitigating roll select index. At least in a backtest to 2009, it works as advertised. Not a magic bullet, obviously, since commodities can lose value (as can stocks). But the roll methodology seems to help.
Here is the last 8 years compared with USCI: https://www.portfoliovisualizer.com/bac ... ation4_2=5
In both cases there wasn't much difference in performance, and the performance advantage went to the commodity producing companies vs the futures. Admittedly not an exact comparison, since the commodity fund invests in more than energy and gold (so maybe some of the other commodities dragged it down), but it doesn't appear the needle will be moved much unless you up the commodity allocation.
Re: Broad commodity investing with iShares CMDY ETF
asif408 wrote: ↑Thu Aug 06, 2020 1:35 pm OP,
Why not just go with funds that invest in the stocks of commodity producers? Those funds have more data backing up their use as a short to medium term inflation hedge. Unfortunately, most of the commodity ETFs utilize futures, which have the issues of contango that have been thoroughly discussed here. If you haven't dug through the old posts about contango, I'd encourage you to read the one with a back and forth between Larry Swedroe and Rick Ferri (IIRC even Bill Bernstein chimed in, so plenty of good insights from several Boglehead authors).
You can buy a gold miners ETF, energy producers ETFs, or other base material ETFs for a low ER and probably will do much better hedging against a short to medium term inflation spike. I personally use FILL (global energy ETF) and GDX/SLVP ( global gold and silver mining ETFs). I specifically avoid anything with futures because of the issues with contango. I guess it's possible if you get a situation of backwardation during a time of inflation they will work well, but if they are in contango during that time it might reduce or eliminate any benefit you are trying to get. At least with the stocks of the producers the issue of backwardation/contango is eliminated.
Do you have a source to share that supports the claim that equity of commodity producers has higher correlation (than commodity spot prices) to inflation, and more importantly, unexpected inflation? I know you can't invest in spot prices, but I've seen a bunch studies historically supporting correlation between spot prices (and historically the indices) and unexpected inflation (and expected inflation, though a bit less). On the other hand, I was always under the assumption that miners/producers lagged by a few years as they have forward prices locked in 1-2 yrs in the future, and they have to ramp up Capex to take advantage of the higher prices.
Re: Broad commodity investing with iShares CMDY ETF
I don't have a source because I didn't claim that equity of commodity producers has a higher correlation than spot prices. My point was that the futures have issues the producers do not, and the evidence shows that the producers do provide some protection against short term inflation. I can point you to that if you like.BJJ_GUY wrote: ↑Thu Aug 06, 2020 2:27 pmasif408 wrote: ↑Thu Aug 06, 2020 1:35 pm OP,
Why not just go with funds that invest in the stocks of commodity producers? Those funds have more data backing up their use as a short to medium term inflation hedge. Unfortunately, most of the commodity ETFs utilize futures, which have the issues of contango that have been thoroughly discussed here. If you haven't dug through the old posts about contango, I'd encourage you to read the one with a back and forth between Larry Swedroe and Rick Ferri (IIRC even Bill Bernstein chimed in, so plenty of good insights from several Boglehead authors).
You can buy a gold miners ETF, energy producers ETFs, or other base material ETFs for a low ER and probably will do much better hedging against a short to medium term inflation spike. I personally use FILL (global energy ETF) and GDX/SLVP ( global gold and silver mining ETFs). I specifically avoid anything with futures because of the issues with contango. I guess it's possible if you get a situation of backwardation during a time of inflation they will work well, but if they are in contango during that time it might reduce or eliminate any benefit you are trying to get. At least with the stocks of the producers the issue of backwardation/contango is eliminated.
Do you have a source to share that supports the claim that equity of commodity producers has higher correlation (than commodity spot prices) to inflation, and more importantly, unexpected inflation? I know you can't invest in spot prices, but I've seen a bunch studies historically supporting correlation between spot prices (and historically the indices) and unexpected inflation (and expected inflation, though a bit less). On the other hand, I was always under the assumption that miners/producers lagged by a few years as they have forward prices locked in 1-2 yrs in the future, and they have to ramp up Capex to take advantage of the higher prices.
You can look at, for example, Bill Bernstein's Deep Risk book, where he calculated the return of commodity producing companies vs. the S&P during the years of highest inflation (which mostly occurred in the 1970s). I don't have the book in front of me, but it's a cheap book and easily available online (I think he re-published it in his Rational Expectations book as well). On average, they provided a positive real return during high inflation years (though not every single year) while the S&P on average produced a negative real return.
In addition, GMO has done some research into it and come to a similar conclusion (see page 6 in particular, they went back farther in history): https://www.gmo.com/globalassets/articl ... s_9-16.pdf
Re: Broad commodity investing with iShares CMDY ETF
Really tough comparison here. GDX/FILL combine to give you gold and oil, so it's not an apples-to-apples comparison with CMDY (or USCI) which are well-balanced with farm products, too. The backtest you link doesn't hit an inflationary period, as you note, so it's not too useful.asif408 wrote: ↑Thu Aug 06, 2020 2:09 pmIt's hard to test during an actual inflation spike, since most of the commodity funds haven't been around during an inflation spike, so I'll just look at the history available. At the amount your are suggesting (10%), doing some quick comparisons I see very little difference between what I am suggesting and your proposal. See, for example, the last year 2 years holding CMDY vs a combination of GDX/FILL added to a target date fund: https://www.portfoliovisualizer.com/bac ... ation4_2=5chem wrote: ↑Thu Aug 06, 2020 1:49 pmWell, USCI was first, but for the fund at hand, check out the chart on page 1 here (from OP):asif408 wrote: ↑Thu Aug 06, 2020 1:43 pmCall me skeptical for any fund that claims they can control for contango issues, since it is only known after the fact. They could be the first, but no fund as of yet has managed to control for it. Personally I'm not interested in being the guinea pig, but if you don't mind and are willing to accept that it may fail go for it.chem wrote: ↑Thu Aug 06, 2020 1:41 pm That's a reasonable option, but, I wanted balanced one-stop shopping for all commodities including agriculture.
Regarding contango, that's a MAJOR reason why I'm leaning toward the CMDY ETF. Check out the methodology here (from OP):
https://data.bloomberglp.com/indices/si ... lement.pdf
and fact sheet here (from later post):
https://www.ishares.com/us/literature/p ... -en-us.pdf
It's specifically designed to maximize exposure to backwardation and minimize exposure to contango across eligible futures contracts, addressing your contango concern. I suspect that's part of the reason why it's strongly outperforming other commodities funds this year.
https://data.bloomberglp.com/profession ... heet-2.pdf
It's a direct comparison since 2009 of the general BCOM commodity index vs. the contango-mitigating roll select index. At least in a backtest to 2009, it works as advertised. Not a magic bullet, obviously, since commodities can lose value (as can stocks). But the roll methodology seems to help.
Here is the last 8 years compared with USCI: https://www.portfoliovisualizer.com/bac ... ation4_2=5
In both cases there wasn't much difference in performance, and the performance advantage went to the commodity producing companies vs the futures. Admittedly not an exact comparison, since the commodity fund invests in more than energy and gold (so maybe some of the other commodities dragged it down), but it doesn't appear the needle will be moved much unless you up the commodity allocation.
The last inflationary spike was going from 2007 to 2008 (or 2009 to 2011) according to FRED data:
https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
USCI and CMDY did not exist then, and in portfolioviz I can't directly plot the underlying index for CMDY. But, a 50/50 GDX and oil-producer portfolio far trailed either GSG or DBC (two other somewhat broad-basked commodity futures ETFs) during that time period:
https://www.portfoliovisualizer.com/bac ... tion4_1=50
(edit: note how equities catch up eventually, of course)
So, even using "lesser" commodity ETFs, commodity futures performed quite well compared to commodity equities at a relevant past time frame! I think investing directly in commodities may have merit, and it's certainly simpler if you can get everything in 1 ETF. But I would also understand if someone preferred to stay in equities.
Re: Broad commodity investing with iShares CMDY ETF
I don't have a source because I didn't claim that equity of commodity producers has a higher correlation than spot prices. My point was that the futures have issues the producers do not, and the evidence shows that the producers do provide some protection against short term inflation. I can point you to that if you like.asif408 wrote: ↑Thu Aug 06, 2020 2:51 pm
Do you have a source to share that supports the claim that equity of commodity producers has higher correlation (than commodity spot prices) to inflation, and more importantly, unexpected inflation? I know you can't invest in spot prices, but I've seen a bunch studies historically supporting correlation between spot prices (and historically the indices) and unexpected inflation (and expected inflation, though a bit less). On the other hand, I was always under the assumption that miners/producers lagged by a few years as they have forward prices locked in 1-2 yrs in the future, and they have to ramp up Capex to take advantage of the higher prices.
You can look at, for example, Bill Bernstein's Deep Risk book, where he calculated the return of commodity producing companies vs. the S&P during the years of highest inflation (which mostly occurred in the 1970s). I don't have the book in front of me, but it's a cheap book and easily available online (I think he re-published it in his Rational Expectations book as well). On average, they provided a positive real return during high inflation years (though not every single year) while the S&P on average produced a negative real return.
In addition, GMO has done some research into it and come to a similar conclusion (see page 6 in particular, they went back farther in history): https://www.gmo.com/globalassets/articl ... s_9-16.pdf
[/quote]
Thanks, I'll check out the GMO piece.
Re: Broad commodity investing with iShares CMDY ETF
Thanks, I'll check out the GMO piece.asif408 wrote: ↑Thu Aug 06, 2020 2:51 pm
You can look at, for example, Bill Bernstein's Deep Risk book, where he calculated the return of commodity producing companies vs. the S&P during the years of highest inflation (which mostly occurred in the 1970s). I don't have the book in front of me, but it's a cheap book and easily available online (I think he re-published it in his Rational Expectations book as well). On average, they provided a positive real return during high inflation years (though not every single year) while the S&P on average produced a negative real return.
In addition, GMO has done some research into it and come to a similar conclusion (see page 6 in particular, they went back farther in history): https://www.gmo.com/globalassets/articl ... s_9-16.pdf
Re: Broad commodity investing with iShares CMDY ETF
It may, I just think at the level you are investing in them it's not likely to make too much difference. Your example used 100%, vs your proposal of 10%. A 10% allocation didn't really make much difference either way: https://www.portfoliovisualizer.com/bac ... tion5_3=90. I wouldn't be stressing over a 10% allocation to anything, TBH.chem wrote: ↑Thu Aug 06, 2020 2:56 pm Really tough comparison here. GDX/FILL combine to give you gold and oil, so it's not an apples-to-apples comparison with CMDY (or USCI) which are well-balanced with farm products, too. The backtest you link doesn't hit an inflationary period, as you note, so it's not too useful.
The last inflationary spike was going from 2007 to 2008 (or 2009 to 2011) according to FRED data:
https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
USCI and CMDY did not exist then, and in portfolioviz I can't directly plot the underlying index for CMDY. But, a 50/50 GDX and oil-producer portfolio far trailed either GSG or DBC (two other somewhat broad-basked commodity futures ETFs) during that time period:
https://www.portfoliovisualizer.com/bac ... tion4_1=50
(edit: note how equities catch up eventually, of course)
So, even using "lesser" commodity ETFs, commodity futures performed quite well compared to commodity equities at a relevant past time frame! I think investing directly in commodities may have merit, and it's certainly simpler if you can get everything in 1 ETF. But I would also understand if someone preferred to stay in equities.
Re: Broad commodity investing with iShares CMDY ETF
That's true, if I only invest 10% of my asset allocation into this asset class, then the other 90% will likely dominate the returns. But, I'm just trying to make a good, well-informed decision with any part of my allocation, no matter if it's only 10%. And maybe at some future point it becomes more than 10%. Really appreciate all the discussion here, thanks.asif408 wrote: ↑Thu Aug 06, 2020 3:11 pmIt may, I just think at the level you are investing in them it's not likely to make too much difference. Your example used 100%, vs your proposal of 10%. A 10% allocation didn't really make much difference either way: https://www.portfoliovisualizer.com/bac ... tion5_3=90. I wouldn't be stressing over a 10% allocation to anything, TBH.chem wrote: ↑Thu Aug 06, 2020 2:56 pm Really tough comparison here. GDX/FILL combine to give you gold and oil, so it's not an apples-to-apples comparison with CMDY (or USCI) which are well-balanced with farm products, too. The backtest you link doesn't hit an inflationary period, as you note, so it's not too useful.
The last inflationary spike was going from 2007 to 2008 (or 2009 to 2011) according to FRED data:
https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
USCI and CMDY did not exist then, and in portfolioviz I can't directly plot the underlying index for CMDY. But, a 50/50 GDX and oil-producer portfolio far trailed either GSG or DBC (two other somewhat broad-basked commodity futures ETFs) during that time period:
https://www.portfoliovisualizer.com/bac ... tion4_1=50
(edit: note how equities catch up eventually, of course)
So, even using "lesser" commodity ETFs, commodity futures performed quite well compared to commodity equities at a relevant past time frame! I think investing directly in commodities may have merit, and it's certainly simpler if you can get everything in 1 ETF. But I would also understand if someone preferred to stay in equities.
Re: Broad commodity investing with iShares CMDY ETF
Are you an industrial producer or consumer of commodities? If not, you don't need to invest in commodity futures.
It would be like buying crop insurance if you're not a farmer.
It would be like buying crop insurance if you're not a farmer.
Re: Broad commodity investing with iShares CMDY ETF
I don't quite understand this sentiment. Are you an industrial producer or consumer of gold? But, clearly you bought gold:
viewtopic.php?f=10&t=322039
For an investor seeking total returns, I don't see much of a functional difference between a commodity ETF that's backed by physical assets vs. one that's a basket of futures. I'm not aware of an ETF backed by live cattle and physical coffee and physical barrels of oil, but it's easy to find one involving their futures and it seems to do a similar thing at the end of the day, heh.
Re: Broad commodity investing with iShares CMDY ETF
I view Gold as a currency of last resort, not a commodity. I understand that many disagree, but that is my reasoning.chem wrote: ↑Thu Aug 06, 2020 3:23 pmI don't quite understand this sentiment. Are you an industrial producer or consumer of gold? But, clearly you bought gold:
viewtopic.php?f=10&t=322039
For an investor seeking total returns, I don't see much of a functional difference between a commodity ETF that's backed by physical assets vs. one that's a basket of futures. I'm not aware of an ETF backed by live cattle and physical coffee and physical barrels of oil, but it's easy to find one involving their futures and it seems to do a similar thing at the end of the day, heh.
My point is that if you are looking for an asset outside of stocks, bonds, and cash, a more reasonable commodity investment would be durable consumer goods you can actually use and store yourself: canned food, toilet paper, toothpaste, etc.
Re: Broad commodity investing with iShares CMDY ETF
It is an interesting discussion. FWIW, I looked back to the 1976-1980 period, which is probably the worst period of sustained multi year inflation in recent times for which we have some actual fund/stock data. I compared the Vanguard S&P (inception 1976) through 1980 to the oldest gold miners fund I know of (FKRCX) and Exxon and Chevron (oldest energy companies I could think of, there are probably others I could have tossed in, I couldn't find an energy fund): http://quotes.morningstar.com/chart/fun ... A%5B%5D%7Dchem wrote: ↑Thu Aug 06, 2020 3:14 pmThat's true, if I only invest 10% of my asset allocation into this asset class, then the other 90% will likely dominate the returns. But, I'm just trying to make a good, well-informed decision with any part of my allocation, no matter if it's only 10%. And maybe at some future point it becomes more than 10%. Really appreciate all the discussion here, thanks.asif408 wrote: ↑Thu Aug 06, 2020 3:11 pmIt may, I just think at the level you are investing in them it's not likely to make too much difference. Your example used 100%, vs your proposal of 10%. A 10% allocation didn't really make much difference either way: https://www.portfoliovisualizer.com/bac ... tion5_3=90. I wouldn't be stressing over a 10% allocation to anything, TBH.chem wrote: ↑Thu Aug 06, 2020 2:56 pm Really tough comparison here. GDX/FILL combine to give you gold and oil, so it's not an apples-to-apples comparison with CMDY (or USCI) which are well-balanced with farm products, too. The backtest you link doesn't hit an inflationary period, as you note, so it's not too useful.
The last inflationary spike was going from 2007 to 2008 (or 2009 to 2011) according to FRED data:
https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
USCI and CMDY did not exist then, and in portfolioviz I can't directly plot the underlying index for CMDY. But, a 50/50 GDX and oil-producer portfolio far trailed either GSG or DBC (two other somewhat broad-basked commodity futures ETFs) during that time period:
https://www.portfoliovisualizer.com/bac ... tion4_1=50
(edit: note how equities catch up eventually, of course)
So, even using "lesser" commodity ETFs, commodity futures performed quite well compared to commodity equities at a relevant past time frame! I think investing directly in commodities may have merit, and it's certainly simpler if you can get everything in 1 ETF. But I would also understand if someone preferred to stay in equities.
Looks like the gold miners did very well during that time (600% return), a mixed bag with energy with Chevron outpacing the S&P (up 200%) & Exxon about even with the S&P. But overall it looks like the commodity producing stocks did pretty well. In the worst 3 years of inflation in particular (1978-1980) they all outperformed the S&P pretty handily. Would be interesting to see how futures would have done, but we can only speculate. Interesting as well, the commodity producers did very poorly in the following years when inflation was falling.
Re: Broad commodity investing with iShares CMDY ETF
I use the Vanguard fund, but a quick look showed comparable returns for both funds. I doubt CMDY can change the nature of futures markets in terms of their roll strategy.chem wrote: ↑Thu Aug 06, 2020 1:02 pm Great links, thanks. Vanguard's VCMDX also tracks a broad-basket commodity index, but, its returns have significantly trailed CMDY year-to-date (likely due to CMDY's roll strategy -- see their fact sheet for comparison to the standard index similar to what VCMDX tracks).
iShares website for CMDY: -7.79% YTD (listed as -7.71% on Morningstar to use the same source)
Morningstar for VCMDX: -5.94% YTD
Re: Broad commodity investing with iShares CMDY ETF
Good catch, my bad! I was quickly replying and compared the wrong number. Looks like VCMDX is a very good alternative to CMDY. They hold quite similar broad allocations, as they track quite similar indices (both Bloomberg commodity indices). But note, on VCMDX's portfolio strategies and policies page, they say:apex84 wrote: ↑Thu Aug 06, 2020 4:17 pmI use the Vanguard fund, but a quick look showed comparable returns for both funds. I doubt CMDY can change the nature of futures markets in terms of their roll strategy.chem wrote: ↑Thu Aug 06, 2020 1:02 pm Great links, thanks. Vanguard's VCMDX also tracks a broad-basket commodity index, but, its returns have significantly trailed CMDY year-to-date (likely due to CMDY's roll strategy -- see their fact sheet for comparison to the standard index similar to what VCMDX tracks).
iShares website for CMDY: -7.79% YTD (listed as -7.71% on Morningstar to use the same source)
Morningstar for VCMDX: -5.94% YTD
I wonder if they actively intervened during the negative oil crisis? Interesting. Well, regardless, good job by VCMDX. CMDY really is beating the other ETFs I mentioned YTD, though. VCMDX is not really truly a passive fund; they try to reflect the index but that interview you linked also mentions they do things differently by including TIPS collateral and selecting futures contracts differently than the index.The fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies—for instance, by allocating substantial assets to cash equivalent investments or other less volatile instruments—in response to adverse or unusual market, economic, political, or other conditions. In doing so, the fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
So, I'd consider VCMDX a perfectly good alternative to CMDY unless I specifically wanted an ETF wrapper for daily trading, or didn't want to put the VCMDX minimum investment of $50k into commodities.
Re: Broad commodity investing with iShares CMDY ETF
Although we aren't industrial consumers, we all consume commodities downstream, so there's logic to using commodities as an inflation hedge.
That said, I'm not crazy about futures. You get inflation exposure, but the expense ratios run a little hot, and roll yields have often been negative. You also don't get exposure to non-commodity sources of inflation (healthcare, education, etc.). TIPS may have negative yield, but they're tied to an inflation metric that better represents the average person.
If you want commodities exposure, I'd do the Bill Bernstein thing and buy natural resources funds (including precious metals and energy). There is a somewhat pricey ETF (I think it's around 45 bps) under the ticker GNR that tracks an index of upstream commodities producers. It attempts to include agriculture by holding chemical companies that produce fertilizers and things of the sort.
By holding commodities producers, you have upside if prices spike, but your expected real return should be closer to the returns of equities than of TIPS.
Re: Broad commodity investing with iShares CMDY ETF
Interesting idea, thanks for sharing. I do wonder though if commodity producers are more or less likely to hold up well during an inflationary environment. A lot of the energy sector seems to be in a precarious position right now.Dominic wrote: ↑Thu Aug 06, 2020 9:44 pmAlthough we aren't industrial consumers, we all consume commodities downstream, so there's logic to using commodities as an inflation hedge.
That said, I'm not crazy about futures. You get inflation exposure, but the expense ratios run a little hot, and roll yields have often been negative. You also don't get exposure to non-commodity sources of inflation (healthcare, education, etc.). TIPS may have negative yield, but they're tied to an inflation metric that better represents the average person.
If you want commodities exposure, I'd do the Bill Bernstein thing and buy natural resources funds (including precious metals and energy). There is a somewhat pricey ETF (I think it's around 45 bps) under the ticker GNR that tracks an index of upstream commodities producers. It attempts to include agriculture by holding chemical companies that produce fertilizers and things of the sort.
By holding commodities producers, you have upside if prices spike, but your expected real return should be closer to the returns of equities than of TIPS.
Re: Broad commodity investing with iShares CMDY ETF
In Deep Risk, Bernstein's data showed that commodities producers have historically done well in inflationary environments. Still, this strategy assumes that inflation is either currency or natural resource-driven. I could envision a scenario in which energy prices fall, but inflation spikes.000 wrote: ↑Thu Aug 06, 2020 10:05 pmInteresting idea, thanks for sharing. I do wonder though if commodity producers are more or less likely to hold up well during an inflationary environment. A lot of the energy sector seems to be in a precarious position right now.Dominic wrote: ↑Thu Aug 06, 2020 9:44 pmAlthough we aren't industrial consumers, we all consume commodities downstream, so there's logic to using commodities as an inflation hedge.
That said, I'm not crazy about futures. You get inflation exposure, but the expense ratios run a little hot, and roll yields have often been negative. You also don't get exposure to non-commodity sources of inflation (healthcare, education, etc.). TIPS may have negative yield, but they're tied to an inflation metric that better represents the average person.
If you want commodities exposure, I'd do the Bill Bernstein thing and buy natural resources funds (including precious metals and energy). There is a somewhat pricey ETF (I think it's around 45 bps) under the ticker GNR that tracks an index of upstream commodities producers. It attempts to include agriculture by holding chemical companies that produce fertilizers and things of the sort.
By holding commodities producers, you have upside if prices spike, but your expected real return should be closer to the returns of equities than of TIPS.
It's not a perfect inflation hedge, but it has worked before, and it's much easier to stomach than a derivatives strategy.
Re: Broad commodity investing with iShares CMDY ETF
https://www.portfoliovisualizer.com/ba ... tion4_1=50chem wrote: ↑Thu Aug 06, 2020 2:56 pmReally tough comparison here. GDX/FILL combine to give you gold and oil, so it's not an apples-to-apples comparison with CMDY (or USCI) which are well-balanced with farm products, too. The backtest you link doesn't hit an inflationary period, as you note, so it's not too useful.asif408 wrote: ↑Thu Aug 06, 2020 2:09 pmIt's hard to test during an actual inflation spike, since most of the commodity funds haven't been around during an inflation spike, so I'll just look at the history available. At the amount your are suggesting (10%), doing some quick comparisons I see very little difference between what I am suggesting and your proposal. See, for example, the last year 2 years holding CMDY vs a combination of GDX/FILL added to a target date fund: https://www.portfoliovisualizer.com/bac ... ation4_2=5chem wrote: ↑Thu Aug 06, 2020 1:49 pmWell, USCI was first, but for the fund at hand, check out the chart on page 1 here (from OP):asif408 wrote: ↑Thu Aug 06, 2020 1:43 pmCall me skeptical for any fund that claims they can control for contango issues, since it is only known after the fact. They could be the first, but no fund as of yet has managed to control for it. Personally I'm not interested in being the guinea pig, but if you don't mind and are willing to accept that it may fail go for it.chem wrote: ↑Thu Aug 06, 2020 1:41 pm That's a reasonable option, but, I wanted balanced one-stop shopping for all commodities including agriculture.
Regarding contango, that's a MAJOR reason why I'm leaning toward the CMDY ETF. Check out the methodology here (from OP):
https://data.bloomberglp.com/indices/si ... lement.pdf
and fact sheet here (from later post):
https://www.ishares.com/us/literature/p ... -en-us.pdf
It's specifically designed to maximize exposure to backwardation and minimize exposure to contango across eligible futures contracts, addressing your contango concern. I suspect that's part of the reason why it's strongly outperforming other commodities funds this year.
https://data.bloomberglp.com/profession ... heet-2.pdf
It's a direct comparison since 2009 of the general BCOM commodity index vs. the contango-mitigating roll select index. At least in a backtest to 2009, it works as advertised. Not a magic bullet, obviously, since commodities can lose value (as can stocks). But the roll methodology seems to help.
Here is the last 8 years compared with USCI: https://www.portfoliovisualizer.com/bac ... ation4_2=5
In both cases there wasn't much difference in performance, and the performance advantage went to the commodity producing companies vs the futures. Admittedly not an exact comparison, since the commodity fund invests in more than energy and gold (so maybe some of the other commodities dragged it down), but it doesn't appear the needle will be moved much unless you up the commodity allocation.
The last inflationary spike was going from 2007 to 2008 (or 2009 to 2011) according to FRED data:
https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
USCI and CMDY did not exist then, and in portfolioviz I can't directly plot the underlying index for CMDY. But, a 50/50 GDX and oil-producer portfolio far trailed either GSG or DBC (two other somewhat broad-basked commodity futures ETFs) during that time period:
https://www.portfoliovisualizer.com/bac ... tion4_1=50
(edit: note how equities catch up eventually, of course)
So, even using "lesser" commodity ETFs, commodity futures performed quite well compared to commodity equities at a relevant past time frame! I think investing directly in commodities may have merit, and it's certainly simpler if you can get everything in 1 ETF. But I would also understand if someone preferred to stay in equities.
Amateur Self-Taught Senior Macro Strategist
Re: Broad commodity investing with iShares CMDY ETF
Looking into commodity producer ETFs, this one (GUNR) seems a like best-of-breed:Dominic wrote: ↑Thu Aug 06, 2020 9:44 pmAlthough we aren't industrial consumers, we all consume commodities downstream, so there's logic to using commodities as an inflation hedge.
That said, I'm not crazy about futures. You get inflation exposure, but the expense ratios run a little hot, and roll yields have often been negative. You also don't get exposure to non-commodity sources of inflation (healthcare, education, etc.). TIPS may have negative yield, but they're tied to an inflation metric that better represents the average person.
If you want commodities exposure, I'd do the Bill Bernstein thing and buy natural resources funds (including precious metals and energy). There is a somewhat pricey ETF (I think it's around 45 bps) under the ticker GNR that tracks an index of upstream commodities producers. It attempts to include agriculture by holding chemical companies that produce fertilizers and things of the sort.
By holding commodities producers, you have upside if prices spike, but your expected real return should be closer to the returns of equities than of TIPS.
https://www.flexshares.com/funds/GUNR
Most AUM in class, clear theme, and balanced holdings including agri/farm equities. It could be an alternative to CMDY, but it has trailed commodity futures ETF USCI since July 1, when inflation concerns started ramping up (and I'm guessing CMDY too but don't have that chart pulled up right now).
They really are different types of investments, though. It's possible for commodity prices to go up and businesses to do poorly. GUNR would be a better LONG term hold than CMDY, for sure. Rest of 2020? That's a harder question.
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Re: Broad commodity investing with iShares CMDY ETF
Indeed, you won't see it if you open Vanguard's page that lists its mutual funds. Once you open it it will list 132 funds, but there are, in fact, 187. The way you can see this:
1. Click 'FILTER' button
2. In the pop-up under 'Fund minimum' check off '$50,000 and up'
3. Click 'SEE FUNDS' button
You might wonder why Vanguard does it this way, initially pre-filtering the results. I have no idea.
https://investor.vanguard.com/mutual-fu ... nd-returns
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Re: Broad commodity investing with iShares CMDY ETF
Commodities did nicely during the inflation melt up from '68 to '80. Using the below graph 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.
I don't know if you get the Wall Street Journal, but here is a favorable article about commodity investing by Jason Zweig,
https://www.wsj.com/articles/its-slow-g ... 1574437225
I don't know if you get the Wall Street Journal, but here is a favorable article about commodity investing by Jason Zweig,
https://www.wsj.com/articles/its-slow-g ... 1574437225
Re: Broad commodity investing with iShares CMDY ETF
great graph, thanks! I'll have to look up what that CRB index tracks.
Re: Broad commodity investing with iShares CMDY ETF
Commodity funds are a touchy subject around here for sure. Having been a member here for some time, I see that there is a lot of recency bias when it comes to non-TSM and non-total bond holdings.
When commodities were having their outsized returns, there was a lot of discussion about what a great diversifier they were. Now that commodity funds have dropped almost 90% they are persona nongrata.
As always, investments are usually a good buy after a period of poor performance than after a period of stellar performance. The big exception is of the asset in question is on it's way toward extinction.
Personally I think it's a great time to get into Commodity funds now. They are relatively cheap compared to past prices. Manufacturers and consumers are always looking to lock in prices to reduce future uncertainty so commodity markets aren't going away. They certainly perform well in times of inflation.
With respect to which commodity fund to go with, that's a tricky question. I went with Vanguard's VCMDX because it's the only one available to me in my account so that was easy. However I was leaning in that direction anyway because of the relatively low ER compared to other funds.
There is a lot of variability between funds with respect to the weighing of various types of commodities. The ideal composition will only be known in retrospect. VCMDX is not overly invested in any one type of commodity and seems reasonably well diversifies so probably as God as any.
When commodities were having their outsized returns, there was a lot of discussion about what a great diversifier they were. Now that commodity funds have dropped almost 90% they are persona nongrata.
As always, investments are usually a good buy after a period of poor performance than after a period of stellar performance. The big exception is of the asset in question is on it's way toward extinction.
Personally I think it's a great time to get into Commodity funds now. They are relatively cheap compared to past prices. Manufacturers and consumers are always looking to lock in prices to reduce future uncertainty so commodity markets aren't going away. They certainly perform well in times of inflation.
With respect to which commodity fund to go with, that's a tricky question. I went with Vanguard's VCMDX because it's the only one available to me in my account so that was easy. However I was leaning in that direction anyway because of the relatively low ER compared to other funds.
There is a lot of variability between funds with respect to the weighing of various types of commodities. The ideal composition will only be known in retrospect. VCMDX is not overly invested in any one type of commodity and seems reasonably well diversifies so probably as God as any.
The Espresso portfolio: |
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20% US TSM, 20% Small Value, 10% US REIT, 10% Dev Int'l, 10% EM, 10% Commodities, 20% Inter-term US Treas |
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"A journey of a thousand miles begins with a single step."
Re: Broad commodity investing with iShares CMDY ETF
yeah, recency bias is a real thing in all sectors of the market. nice to see another vote for VCMDX as a Vanguard alternative to CMDY! Shame about its minimum buy-in, that will scare off some folks.
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Re: Broad commodity investing with iShares CMDY ETF
There's another reason for challenging the "great diversifier" story beyond return: the apparent sharp change in correlation, often attributed to "financialization" (the idea that the nature of commodity futures might changed when it became opened up to large numbers of retail investors by way of mutual funds and ETFs). Sufficiently low correlation could have justified low return. But the combination of low return without very low correlation is deadly.
Also, "commodities" (collateralized commodity futures funds and ETFs) were controversial in this forum long before they began losing money, and were actually the source of some famously contentious debates.
This chart would be even more striking if it were based on older data instead of just mutual funds.
Source
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Re: Broad commodity investing with iShares CMDY ETF
well, the beta for CMDY is about 50-60% of the beta for GUNR.
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Re: Broad commodity investing with iShares CMDY ETF
John Bogle towards the end of his life began to explore commodities as a portfolio allocation.
So you may have caught on to the logical evolution of the three fund portfolio.
So you may have caught on to the logical evolution of the three fund portfolio.
Re: Broad commodity investing with iShares CMDY ETF
Nice - has anyone created a 4-fund port using commodities?RomeoMustDie wrote: ↑Wed Aug 12, 2020 7:57 am John Bogle towards the end of his life began to explore commodities as a portfolio allocation.
So you may have caught on to the logical evolution of the three fund portfolio.
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Re: Broad commodity investing with iShares CMDY ETF
Yeah, I own commodities and gold.chem wrote: ↑Thu Aug 13, 2020 6:32 amNice - has anyone created a 4-fund port using commodities?RomeoMustDie wrote: ↑Wed Aug 12, 2020 7:57 am John Bogle towards the end of his life began to explore commodities as a portfolio allocation.
So you may have caught on to the logical evolution of the three fund portfolio.
VTI
BND
GLD
BCI (vanguard has a new commodity fund thats probably much better than this etf)
Tune the ratios to your own personal risk tolerance.
Bogle suggested gold at 5% so maybe a 2.5% split between gold and commodities makes sense.
Re: Broad commodity investing with iShares CMDY ETF
BCI has very similar performance to CMDY, just very slightly worse. It also tracks a bloomberg commodity index. I imagine it performs similar to the vanguard fund. Good find!
Re: Broad commodity investing with iShares CMDY ETF
CMDY has not seen any significant fund outflows in the past 3 months:
https://etfdb.com/etf/CMDY/#fund-flows
I like ETFs that are growing!
https://etfdb.com/etf/CMDY/#fund-flows
I like ETFs that are growing!