Commodity exchange traded funds (ETF) often expose investors to an undesired level of risk due to the volatility among commodity markets, however GreenHaven Continuous Commodity's (GCC) nature of high diversification makes this ETF the least volatile in contrast to competing funds. This article begins with the reasoning behind why I feel GCC is an excellent investment that is prompted to benefit from sequestration. Then it highlights the funds general attributes, recent market performance, and concludes with the funds asset composition.
It is clear that sequestration is inevitably going to have a major impact on the U.S. economy. For those who are unfamiliar, sequestration is basically a large budget cut that entails a total reduction of $1.2 trillion and is to be spread out over a nine year period. The budget cuts cover a vast range of government entities, but are to be equally split between domestic and defense-related expenditures. In the short-run, we are looking at roughly $85 billion worth of spending cuts that are set to go into effect this year. Looking forward, one of the main issues I feel will derive from sequestration is augmented levels of inflation.
An excellent example of how end-market consumers will be affected by sequestration can be easily examined by first understanding how this will impact government entities such as the United States Department of Agriculture (USDA). One of the consequences of federal budget cuts is simply going to result in a reduction in government pay worker salaries and also result in fewer workers for some companies and organization. The USDA anticipates reducing the amount of its employees assigned to inspecting meat, which will simultaneously cause a reduction in inspection rates. Assuming the demand for meat remains constant, basic economics suggests that the lowered capacity and supply will ultimately produce a rapid demand shock, which unfortunately will only cause prices to go up. As simple as this may sound, this is just one example of how these large reductions in government expenditures are going to fundamentally change the economic environment and alter investment strategies. Since CCG is a commodity ETF, I feel it is perfectly positioned to outperform with short-term increases in expected inflation.
Fund Overview & Performance
CCG is a limited partnership and requires gains made over the course of the year to be realized and passed through to investors. Sixty percent of the gains will be taxed at the long-term rate and forty percent at the short-term rate, regardless if the fund has been sold by the investor or not. The only exemption is gains achieved through the industrial metals portion of the portfolio.
CCG has provided a return of -2.32% year-to-date. It's currently trading right above $28 per share at a discount of about 0.4% to its net asset value. Currently, its total asset composition amounts to approximately $485 million. In addition, it has a five start rating from Morningstar.
Figure 1: GCC's Five Year Price Graph
In practice, it's typical for ETF managers use traditional allocation methods that assign weights to assets based on economic fundamentals and predictions that are relevant to the particular industry or security of interest. GCC's asset allocation is quite different. GCC's portfolio composition is unique and consists of an equal weighted distributed across the commodities. GCC mimics the price and yield performance of the Thomas Reuters Continuous Commodity Total Return index, which tracks 17 equally weighted commodities.
Prior to 2013, the Thomas Reuters Continuous Commodity Total Return index used the geometric mean calculation for averaging the weights, however it recently switched to using arithmetic averaging. This should aid in eliminating tracking errors in the index returns. In contrast to competing funds, GCC has the least exposure to energy commodities and the greatest exposure to agriculture commodities. The respective break downs are:
- Agriculture - 47%
- Metals - 18%
- Energy - 18%
- Livestock - 12%
- Industrial metals - 6%
Clearly, sequestration is going to have both short- and long-term impact on the U.S. economy. But the largest profits will derive from targeting the keen areas that will be stimulated as a result of this new legislation. In conclusion, the assets held within GCC are well positioned to benefit from phased budget cuts and GCC will serve as an excellent investment for those who are anticipating increased in inflation.
Sources: TD Ameritrade, Google Finance, Yahoo Finance, & the Wall Street Journal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.