In yesterday’s article we outlined some of the reasons why people are accusing commodity investing of fading from long-term portfolios. Research has shown that a number of major institutions have been pulling funds from commodity allocations in recent months, and the returns on broad indexes have been relatively volatile in the past few years. Still, there are two sides to every story, and while major financial institutions may be re-allocating, there are plenty of others who are staying put in the hard asset space [for more commodity news and analysis subscribe to our free newsletter].
One Person’s Trash…
Yesterday’s article cited a number of U.S. institutions that had fallen complacent in the commodity space, but the trend abroad seems to be quite the opposite. ETF Securities recently conducted a survey at their European conference, interviewing some 350 investment professionals to see what their commodity allocations were for 2012, and what they would be for 2013. Many reported that their allocations would be increasing, with 40% reporting a planned commodity allocation between 8-10% for the coming year.
“Global growth is showing signs of recovery, with the United States and China leading the way. The monetary policy of major developed economies is expected to remain highly accommodative in 2013. Both of these factors are supportive of cyclical assets, with commodities standing out as key beneficiaries,” said Nicholas Brooks, Head of Investment Strategy at ETF Securities.
Curiously, it seems that investors in Europe view the global economy’s progress as a bullish sign for commodities, while those in the United States seem to have a different sentiment, as outlined yesterday. But the survey also revealed some unique data on exactly how investors were gaining and adding commodity exposure for themselves [see also The Ten Commandments of Commodity Investing].
The ETF Trend
The survey showed that “40% of the investors currently use ETPs as their primary method of gaining their commodity exposure, followed by 20% through equities and the remainder via swaps and futures.” ETFs have been a growing trend in the commodity world for some time now, as many of the products allow investors to execute a strategy that would otherwise be difficult and/or expensive to do on their own. In fact, the second largest ETF in the world belongs under the commodity umbrella, as the SPDR Gold Trust (GLD) is home to approximately $70 billion in assets.
The Bottom Line
Now comes the hard part–deciding what all of this information means for you. As we stated in Part 1, major institutions selling off their commodity assets could cause some unwanted volatility in your portfolio. But at the same time, it appears as though investors abroad are beginning to open their arms to a larger commodity allocation [see also How To Lose Money Investing In Commodities].
To answer the question of whether or not commodity investing is dying, our simple response is no. Commodities will continue to be a major asset class for investors (and producers of said assets) all around the world. The volatility these assets offer makes them ideal candidates for active traders looking for a quick return. As far as long-term investing is concerned, it seems that there is a gridlock between those who feel that commodities are necessary for a diversified portfolio, and those who feel the allocation does more harm than good.
Disclosure: No positions at time of writing.