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Commodity Futures are attractive as diversifiers: they tend to have
stock-like returns, but tend to be relatively uncorrelated with other asset classes.
In fact, Commodity Futures is the best diversifier known to us. For
more information about Commodity Futures, see
here.
There are several very similar investment options available. Which is
best?
All of the options discussed here will likely have very similar performance
and will get the job done quite well. You can't go far wrong choosing any
of the options listed here. The funds are listed in rough overall
order of preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
 | DFA Commodity Strategy Portfolio (DCMSX). E/R: 0.47%.
Basically, this fund invests
in futures and futures derivatives designed to track the Dow Jones - UBS Commodities
Index Excess Return. It invests enough in these futures to simulate full investment in
Commodities. A smaller portion of the portfolio is set aside as
collateral. The remaining cash is invested in short-term investment
grade bonds. Actually, tracking the index closely isn't a goal of the fund.
The fund tries to add value by NOT slavishly tracking the index (i.e., it
tries to roll its futures on days other than those specified by the index).
These approaches are done to minimize effective transaction fees associated
with closely tracking the index.
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| PIMCO CommodityRealReturn Strategy Fund Institutional Shares (PCRIX). E/R: 0.74%.
Basically, this fund invests
in futures derivatives designed to track the Dow Jones - UBS Commodities
Index Excess Return. It invests enough in these futures to simulate full investment in
Commodities. A smaller portion of the portfolio is set aside as
collateral. The remaining cash is invested in TIPS. We like this
fund both because it indexes the commodities portion of its investments and
because it has the lowest expense ratio of any alternatives. This fund charges a 2%
redemption fee, payable to the fund, if you sell within 30 days of purchasing.
This is intended to be a disincentive to use the fund for short-term trading.
Our preference for PCRIX over DBC is not a strong one.
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| PowerShares DB Commodity Index Tracking Fund (DBC). E/R:
0.83%. This Exchange-Traded fund invests in commodities futures in its attempt to track the
Deutsche Bank Liquid Commodity Index – Optimum Yield Diversified Excess
Return, a custom commodity index created by Deutsche Bank. It invests the
collateral in short-term bonds. For more
information on ETFs,
see here. Our preference for DBC over GSG is not
a strong one.
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| United States Commodity Index Fund (USCI). E/R: 0.95%.
Basically, this ETF invests in commodities futures in its attempt to track the
Summerhaven Dynamic Commodity Index -
Excess Return Index, a custom commodity index created by Summerhaven
Indexing. It invest the collateral in short-term treasuries. The
index this fund tracks tries to shift to commodities which exhibit traits of
having low inventories, which, they believe, suggests good future returns on
those futures. For more information on ETFs,
see here.
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| iShares S&P GSCI Commodity-Indexed Trust (GSG). E/R: 0.75%.
Basically, this ETF is designed to track the Goldman Sachs Commodity Index -
Total Return Index. It
invests enough in CERFs (i.e., futures designed to track the GSCI - Excess
Return Index) to simulate full investment in Commodities.
A smaller portion of the portfolio is set aside as collateral. The
remaining cash is presumedly invested in short-term bonds. We like this fund both because it
indexes the commodities portion of its investments and because it has a very
low expense ratio. We don't like that it tracks the GSCI instead of the
DJ-UBSCI (the GSCI is HEAVILY weighted in energy -- basically, the GSCI is
largely a play on energy futures -- the DJ-UBSCI is much more broadly
diversified across various commodity classes). For more information on ETFs,
see here.
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| Harbor Commodity Real Return Strategy Fund Institutional Shares (HACMX). E/R: 0.94%.
This fund is designed like PCRIX above, only it is newer and more expensive.
We see no reason to buy it, given the above less costly alternatives.
Interestingly, this fund is also managed by PIMCO.
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| Greenhaven Continuous Commodity Index Fund (GCC). E/R: 0.85%.
This ETF is designed to track the Reuters Continuous Commodity Index Total
Return (CCI-TR). This index equal-weights each of 17 commodities.
The fund
invests in futures and treasuries as necessary to emulate the target index.
This fund is relatively new (started in January 2008) and the fund company is
relatively new. We are concerned that the expenses for this fund may end
up being quite high, as the fund company doesn't plan on absorbing any
expenses. For more information on ETFs,
see here.
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| Credit Suisse Commodity Return Strategy Fund A (CRSAX). E/R:
0.95%. This fund follows a similar strategy as PCRIX above, investing in
futures derivatives designed to track the DJ-UBSCI, but it invests the
collateral in short-term Treasury bonds instead of TIPS.
With the availability of the above less expensive alternatives, we see no
reason to consider this fund. If you did consider this fund, only buy it if you can get the
load waived. There exists a less expensive no-load share class of this
fund (CRSOX; E/R: 0.7%), but it is closed to new investors.
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| UBS E-TRACS Dow Jones-UBS Commodity Index Total Return ETN (DJCI). E/R: 0.50%.
This is an Exchange Traded Note (ETN). An ETN is similar to an ETF (for
more information on ETFs,
see here) in that it attempts to track an index and is
traded on an exchange. HOWEVER, it is a bond which is backed only by the
full faith and credit of the issuer, which in this case is UBS AG.
As such, we judge that it has unacceptable credit risk, regardless of the
financial soundness of the issuer (i.e., the credit risk, however small, is
unacceptably high given that it is totally undiversified).
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| UBS E-TRACS Constant Maturity Commodity Index Total Return ETN (UCI). E/R: 0.65%.
This is an Exchange Traded Note (ETN). An ETN is similar to an ETF (for
more information on ETFs,
see here) in that it attempts to track an index and is
traded on an exchange. HOWEVER, it is a bond which is backed only by the
full faith and credit of the issuer, which in this case is UBS AG.
As such, we judge that it has unacceptable credit risk, regardless of the
financial soundness of the issuer (i.e., the credit risk, however small, is
unacceptably high given that it is totally undiversified).
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| iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP). E/R: 0.75%.
This is an Exchange Traded Note (ETN). An ETN is similar to an ETF (for
more information on ETFs,
see here) in that it attempts to track an index and is
traded on an exchange. HOWEVER, it is a bond which is backed only by the
full faith and credit of the issuer, which in this case is Barclay's Bank PLC.
As such, we judge that it has unacceptable credit risk, regardless of the
financial soundness of the issuer (i.e., the credit risk, however small, is
unacceptably high given that it is totally undiversified).
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| iPath GSCI Total Return Index ETN (GSP). E/R: 0.75%.
This is an Exchange Traded Note (ETN). An ETN is similar to an ETF (for
more information on ETFs,
see here) in that it attempts to track an index and is
traded on an exchange. HOWEVER, it is a bond which is backed only by the
full faith and credit of the issuer, which in this case is Barclay's Bank PLC.
As such, we judge that it has unacceptable credit risk, regardless of the
financial soundness of the issuer (i.e., the credit risk, however small, is
unacceptably high given that it is totally undiversified).
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| ELEMENTS Rogers International Commodity Total Return Index ETN (RJI). E/R: 0.75%.
This is an Exchange Traded Note (ETN). An ETN is similar to an ETF (for
more information on ETFs,
see here) in that it attempts to track an index and is
traded on an exchange. HOWEVER, it is a bond which is backed only by
the full faith and credit of the issuer, which in this case is Swedish
Export Credit Corporation. As such, we judge that it has unacceptable
credit risk, regardless of the financial soundness of the issuer (i.e., the
credit risk, however small, is unacceptably high given that it is totally
undiversified).
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| Oppenheimer Real Asset Fund A (QRAAX). E/R: 1.23%. This
fund follows a similar strategy as PCRIX above, but it does NOT index the
commodities portion of its investment and it invests its cash in conventional
very short-term bonds. With the availability of the above less expensive alternatives, we see no
reason to consider this fund. If you did consider this fund, only buy it if you can get the
load waived.
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| Merrill Lynch Real Investment Fund I (MACDX). E/R: 1.32%.
This fund follows a similar strategy as PCRIX above, but it does NOT index the
commodities portion of its investment and it invests its cash in conventional
bonds of any maturity. With the availability of the above less expensive
alternatives, we see no reason to consider this fund. If you did consider this fund, only buy it if you can get the load waived. |
You generally should not hold commodities futures in a taxable account.
The asset class is very tax-inefficient. However, if you did, our
preference would be nearly the same as for a retirement account. The only
difference would be slightly more preference for DBC, because of its expected
perfect capital gains tax efficiency as an ETF (and because the gains from its
futures contracts are treated as being 60% long-term capital gains).
Some suggest that one of the ETNs might make a good choice in a taxable
account. Even if it weren't for their unacceptably high credit risk, we
judge that there is significant question regards their tax efficiency. It
MAY be the case that they are spectacularly tax-efficient (they don't make any
payouts until maturity, so if you hold it for at least one year, 100% of any
profits you make are taxed at the preferentially low long-term gains tax rate).
HOWEVER, while the IRS hasn't ruled specifically on this issue, it has ruled on
taxation of one particular type of ETN -- currency ETNs. And the IRS
ruling was that currency ETNs did not get the favorable tax treatment that ETN
issuers brag about for ETNs in general. We wouldn't be surprised if the
taxation of other ETNs follows the precedent that the IRS set for currency ETNs.
This web page contains the current opinions of Eric E. Haas at the time it is
written — and such opinions are subject to change
without notice. This web page is for educational purposes only —
we believe the information provided here to be useful and accurate at the time
it is written.
Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here.
Before investing, it is important to consult each prospective investment's
prospectus and consider both its risk/return characteristics and its effect on
your overall portfolio.
This information is not intended to be a
substitute for specific individualized tax, legal, or investment planning
advice. Where specific advice is necessary or appropriate, Altruist
recommends consultation with a qualified tax adviser, CPA, financial planner, or
investment adviser. If you would like to discuss the rationale or support
for any particular idea expressed on this web page, feel free to
contact us. |
