commodities

Jimmbron

Hi

I have a portfolio of equities (domestic and emerging) and cash savings, but would like to diversify my risk and start including commodities. I currently only invest through ETFs - I'm a believer in passive rather than active. I don't attempt to take "views" on markets and instead try simply to steadily drip feed money in.

I have no experience with commodities though. What's the best way to get involved with a passive strategy? Are ETFs a good option? Last time I looked into it (about a year ago) I became quickly baffled and gave up so hoping someone can succinctly summarise the options!

Thanks in advance....

jon3001

If you like ETFs, my preferred option is FAIG
http://etfsecurities.com/csl/fwd/etfs_all_commodities_f3.asp

It diversifies over all the major commodities. It invests in 3-month forward contracts in an attempt to maximise roll-yield (an important component of commodity future returns).

For an easy-to-read primer to get some background on commodity investing I recommend: "Hot Commodities", Jim Rogers
http://www.amazon.co.uk/Hot-Commodities-Anyone-Invest-Profitably/dp/0470510765

saveonarola

I thought ETFs were uneconomic for drip-feeding because of the dealing costs? Is it a £1.50 per month regular trade? Or have you got so much to invest monthly that the dealing costs are irrelevant?

I'm new to DIY, just starting to think about a passive portfolio myself, including a commodities ETF (though wondering whether the dealing costs will make the rebalancing uneconomic). Will follow this thread with interest.

jon3001

I don't think the ETFs were available under the £1.50/month dealing option. Given trading costs, my minimum trade is £500. If you can't do that every month, then consider every other month or every three months, etc...

The following unit trust, although not passively managed, might be better for drip-feeding and building up a position. You could always sell and go passive later.
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/marlborough-etf-commodity-fund-accumulation

saveonarola

Tim Hale (Smarter Investing, 2nd ed, 2009) suggests Lyxor ETF CRB GBP or ETFS All Commodities DJ-AIGCI (USD), presumably because they're well-established with a record of low tracking error (I can't say for sure - I'm only halfway through the book!). Being USD, I imagine the latter gives you some extra currency risk/reward. But it has a TER of 0.49%, compared to 0.35% for the Lyxor GBP, so you'd need a good reason to buy it. (The book is at least a couple of years out-of-date, so these suggestions would need to be checked out thoroughly.)

jon3001 wrote: »

I don't think the ETFs were available under the £1.50/month dealing option. Given trading costs, my minimum trade is £500. If you can't do that every month, then consider every other month or every three months, etc...

I'm starting small. I'm looking at a £3,000 lump sum in a commodities ETF, with a larger amount in a few equities trackers, then drip-feed into the equity trackers and (hopefully) build up the commodities ETF with the annual rebalancing. If my sums are right, £3,000 into a commodities ETF with a hypothetical TER of 0.4%, then one annual rebalance at a hypothetical dealing cost of £12.00, gives you an effective TER of 0.8% - still good, though not dirt cheap. Given my limited resources at present, I aim to cut costs to the bone.

Jimmbron

Thanks all for your comments. I'll take a look at your suggestions on the Commodity ETFs/Funds/Books.

"Drip feed" probably wasn't an accurate description. I'd love to drip feed every month (transaction costs aside), but don't have the discipline (why isn't there a brokerage site that lets you set an asset allocation and some re-balancing parameters then just re-balances automatically for you?! They'd make more money, and it'd save hassle for passive folk like me.....!). I probably re-balance 2-3 times per year. So the transaction costs don't worry me too much.

saveonarola

Correction: The CRB index is in USD, so that Lyxor ETF CRB GBP would also presumably have to be converted from USD, just like the ETFS All Commodities DJ-AIGCI (USD). I don't know why one is GBP and the USD, or how exactly the way the currency conversion is done differs. Sorry about that - I was trying to operate above my pay grade...

JamesU

Worth DIY research on FAIG etf vs Marlborough fund. Former commodity basket more volatile in major downturns when they are charted together.

On etfs, would recommend this excellent book to complement Hale's:
http://www.amazon.co.uk/Financial-Times-Guide-Exchange-Traded/dp/0273727834/ref=sr_1_1?ie=UTF8&qid=1316690027&sr=8-1

JamesU

sabretoothtigger

why isn't there a brokerage site that lets you set an asset allocation and some re-balancing parameters then just re-balances automatically for you

Im sure some sort of scheme can be setup. Halifax let you setup a trailing stop loss, so maybe tell it to sell when it drops 3%. They also let you buy within a range, so it will sell at 1500 and buy back at 1000 and will not bother to ask you.

At the same time a monthly purchase will take 50% of account balance into some other ETF to take the money left from your portfolio sales into something else

You could leave that for a year and it'd keep going without ever asking presuming you dont set the trail stop loss on a share which never falls 3%

Im sure quite a few brokers allow these orders to be setup

saveonarola

@Jimmbron

I finally got around to doing a bit of research into commodities and there's a lot more to it than I realised. Before you take the plunge, make sure you read something about 'front-running', 'negative roll-yield' and persistent 'cantango'. It seems that there's no real consensus yet about commodities as an investment, so it's even more important than usual to get as many different opinions as possible so that you can make an informed decision.