For commodity traders, futures contracts and futures-based products are usually the go-to financial instruments for gaining exposure to your favorite hard assets. While futures investing may be appealing, there are many serious drawbacks and costly nuances to this strategy that can impact bottom-line returns. And without fully understanding how futures work and without being able to frequently monitor a trade, futures positions can quickly turn sour. For those who wish to avoid futures, we outline an all ETF portfolio that is designed to provide well-rounded exposure across all of the major commodities completely devoid of these contracts [for more commodity news and analysis subscribe to our free newsletter].
Portfolio Snapshot
First things first, here are the ETFs that we have chosen for this particular portfolio.
| Ticker | ETF | Asset Type | Allocation | Expense Ratio |
|---|---|---|---|---|
| HAP | Market Vector Hard Assets Producers ETF | International Equities | 30.0% | 0.59% |
| LIT | Global X Lithium ETF | International Equities | 10.0% | 0.75% |
| REMX | Market Vectors Rare Earth/Strategic Metals ETF | International Equities | 10.0% | 0.57% |
| CROP | IQ Global Agribusiness Small Cap ETF | International Equities | 10.0% | 0.75% |
| GLTR | ETF Securities Physical Precious Metal Basket Shares | Commodity | 10.0% | 0.60% |
| CCX | Dreyfus Commodity Currency Fund | Currency | 30.0% | 0.55% |
| Weighted Average Expense Ratio | 0.61% | |||
As can be seen above, every single fund in this portfolio is somehow related to the commodity industry. The portfolio features exposure to commodity producer equities, physical bullion, and even currency allocations to top commodity producing countries.
Holdings Overview
Below is a brief overview of each component of this portfolio.
- HAP: This ETF offers broad global exposure to the largest and most prominent companies engaged in the production and distribution of hard assets.
- LIT: This ETF tracks the Solactive Global Lithium Index , which is designed to reflect the performance of the lithium industry.
- REMX: This fund offers diversified exposure to publicly traded companies primarily engaged in the mining, refining, and manufacturing of rare earth/strategic metals.
- CROP: This ETF gives investors access to small cap companies around the globe engaged in the agribusiness sector, including crop production, livestock operations, and biofuels [see also 50 Ways To Invest In Agriculture].
- GLTR: This fund tracks the Precious Metals Basket Index and provides physically-backed exposure to gold, silver, palladium, and platinum.
- CCX: This ETF invests in money market instruments in selected commodity-producing countries, including Brazil, Russia, and Australia.
Historical Return Analysis
| Ticker | 2008 | 2009 | 2010 | 2011 |
|---|---|---|---|---|
| HAP | n/a | 42.5% | 16.5% | -11.7% |
| LIT | n/a | n/a | n/a | -37.0% |
| REMX | n/a | n/a | n/a | -33.9% |
| CROP | n/a | n/a | n/a | n/a |
| GLTR | n/a | n/a | n/a | -2.4% |
| CCX | n/a | n/a | n/a | -3.1% |
| Portfolio | n/a | n/a | n/a | n/a |
| Compare to SPY | -36.7% | 26.3% | 15.0% | 1.8% |
| Compare to AGG | 7.6% | 3.3% | 6.4% | 7.7% |
The adjacent table provides historical results for each component of this portfolio, as well as backtested results (as available) for the entire portfolio during 2008, 2009, 2010, and 2011. The table also shows how this portfolio performed relative to a popular stock market benchmark (SPY) and bond benchmark (AGG).
The majority of the funds included in this portfolio have launched in 2011, and as expected historical performance data is quite limited.
It’s worth noting that commodity producing firms, as represented by HAP, were able to grossly outperform the broad stock market in 2009, while also managing to inch ahead in 2010 as well. The market slump in 2008 highlights the importance of including even minimal allocations to fixed income holdings.
Portfolio Expenses
This portfolio is designed for long-term use consistent with a “buy, hold, and rebalance” strategy. As such, minimization of expenses is necessary to avoid return erosion resulting from compounding costs. To this end, we constructed a portfolio with a weighted-average expense ratio of 61 basis points, which is significantly lower than fees charged by actively-managed mutual funds. The impact of this reduced costs structure over the horizon of this portfolio (i.e., the 30 years during which the client will be retired) is significant [see also The Ten Commandments of Commodity Investing]:
| Growth of $1 Million Over 30 Years @ Annual Return Of: | ||||
|---|---|---|---|---|
| Portfolio | Expense Ratio | 5% | 10% | 15% |
| Futures Free Commodity Portfolio | 0.61% | $3,629,876 | $14,772,288 | $56,461,927 |
| Actively-Managed Mutual Fund Portfolio | 1.00% | $3,243,398 | $13,267,678 | $50,950,159 |
While this can certainly be used as an all encompassing group of holdings, those wishing to stay clear of futures exposure can also use this model portfolio as a smaller part of their overall group of holdings.
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Disclosure: Certain sections of this article were republished with permission from ETFdb.com. Click here to view the original portfolio. No positions at time of writing.
