Managing Editor

GCC Commodity ETF Gets Boost From Reduced Fees

The reason RJI wasn't included in the chart is because it's an exchange-traded note (ETN). The table compares broad-based exchange-trade funds (ETFs) only. It's apples-to-apples that way.

Who's to Blame for the Commodities Boom?

Let's clear the air on a couple of points.

First, about deliveries through futures. Historically, only 2%-3% of futures trades are settled by delivery. In the vast majority of cases, futures trades are offset (bought or sold) before a delivery occurs.

Second, futures market making doesn't follow the securities model. Securities market makers are obliged to maintain two-way (bid/offer) quotes in their designated securities. Not so in futures. As a "local," I can bid, and bid ONLY, for contracts without an obligation to offer out any contracts.

Last, if commodity-based ETFs and ETNs are blamed for adding speculative pressure on the upside, some balance might be acheived by floating "short" or "bearish" commodity index products which have the potential to augment short open interest. Short products have other utilities as well as pointed out in the HAI feature "Where Are The Short Funds?" www.hardassetsinvestor....

Hard Assets Investing: An Interview With Brad Zigler

Taking the absolute route to complex matters such as commodity pricing is, I think, dangerous. The tendency to mean reversion didn't evaporate overnight.

Technological improvements, too, have to be factored in.

Don't get me wrong: I'm not saying that there isn't scarcity. Some of what we see, however, isn't population-related.

From a trading and investment standpoint, there are very few straight lines.

Hard Assets Investing: An Interview With Brad Zigler

Thanks for the feedback.

With respect to the cyclicality of commodity prices, mlasky, let's not forget the statistical tendency towards mean reversion. Yes, populations are growing, but growth RATES can vary significantly. Look at UN Population Division projections for China, as an example, to see an arc leading to stabilization, then decline. Couple that with infrastructure improvements -- woefully ignored during the past two decades of disinflation -- that increase supply and you have the ingredients for price mitigation. Prices may stabilize at higher levels, but GROWTH in prices is like to moderate, meaning those investors who jump on the commodities bandwagon later see less upside potential realized.

As for the "beginner's" allotment to commodities, User, five percent of total assets in a broad-based commodity index-based investments, such as exchange-traded products GSP, GSG, DBC and RJI, are comfortable starting points for most financial advisors and their clients. Shading the allotment upward is a matter of taste and familiarity with portfolio theory.

You're right, Eric, about Swensen's aversion of a commodities allocation in his model. I'm inclined to think he did so because he advocated the use of Vanguard index (or index-like) mutual funds as exemplars of his strategy. Vanguard's low cost (expense ratio wise) and accessibility through dollar cost averaging (systematic investment of fixed dollar amounts over time), together with its ownership structure, were answers to the protestations he leveled against most other mutual funds in "Unconventional Success." You can find a working example of the Swensen portfolio in my Registered Rep. article, "Illiquidity Is Beautiful For Some," registeredrep.com/inve...). There were simply no Vanguard commodity index mutual funds extant when Swensen wrote his manuscript.
Of course, a well-diversified portfolio of ETFs/ETNs -- including an allocation to commodities, as outlined above -- can be used in lieu of mutual funds, but the dollar-cost averaging issue must be addressed for those still in the portfolio-building stage. An account with Zecco.com, though, can be used by retail investors to get commission-free ETF/ETN trades, facilitating the process.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

No worries. UCR and DCR are novelties as far as oil ETFs/ETNs go. They're issued in tandem as complementary sides of a trust made up of credit instruments.

When you deal with the MacroShares products, you're taking on a huge tracking error risk. Tracking spot WTI can be hard enough for "old-fashioned" oil ETFs/ETN when the market's in contango.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

Thanks for your insights.

Look back on the article, though. It says: "SOMEDAY (emphasis added) the commodities tower will topple leaving imprudent investors who've OVERSPENT (again, added emphasis) on commodities vulnerable ..."

Note I haven't said WHEN the reversal of fortunes will occur. To think that commodities will remain in the ascendency indefinitely denies history. Commodities prices and inflation are cyclical, to wit:

Commodity vs. Stock Bull Markets

US Stock Market Producer Price Index
Composite (All Commodities)

1898-1920 61% 228%
1920-1929 196% -38%
1929-1951* -12% -58%
1951-1965 256% 6%
1965-1981 49% 204%
1981-2001 828% 37%

*Includes anomalous effect of the Great Depression (1929 – 1940)
(Source: Legg Mason)

Without market timing, overexposure to the asset class can be deleterious to a portfolio with a date-certain horizon. And how good are any of us in the timing department?


I'm not saying one SHOULDN'T have commodity exposure, only that the allocation be prudent.