Commodity futures trackers

masonic

Commodity futures trackers, for example CRBL, are advocated as a potential portfolio diversifier by Tim Hale. These track a diversified basket of commodity futures contracts. These essentially make up an inflation basket, but the index is subject to a risk premium and also may benefit from regular rebalancing between the fairly diverse underlying assets, which has historically led to positive real returns.

Vanguard do not include commodity futures in their multi-asset funds, "based on our assessment of the risks, costs and complexities. While recognising the historical diversifying benefit of commodity futures, Vanguard cautions against making such an allocation solely based on historical commodity returns. The long-term economic justification for expecting significant, positive returns from a static, long-only commodities futures exposure is
subject to ongoing debate, especially in the costs." (source)

So there may still be some value in using them as a diversifier, although real returns cannot be relied on. I've been considering adding CRBL to one of my portfolios as a diversifier (to make up a little under 10% weighting) and view it as a slightly more attractive option than gold or commodity equity funds. I have noted that there is a renewal cost (roll) of the futures contracts within the ETF, which contributes towards an overall lag of about 1% per year of the ETF vs the index, which is a little offputting. I'm also well aware of the counterparty risk associated with something like this.

What are people's views on these investments?

bowlhead99

masonic wrote: »

Vanguard cautions against making such an allocation solely based on historical commodity returns. The long-term economic justification for expecting significant, positive returns from a static, long-only commodities futures exposure is
subject to ongoing debate, especially in the costs.

I think that's a fair assessment, especially if you are talking a long only fund that is trying to track something cheaply rather than take the gambles of trading to exploit price differences like a long/short commodities-focussed hedge fund.

At a basic level, commodities - whether metals or precious metals or orange juice futures or barrels of oil or rubber trees or whatever - have no income-producing value. They just sit somewhere in storage (or in someone's production line) until it's time to sell.

Instead of them generating you income (e.g. property rental income, company dividend income, loan interest income) they cost you money to store and insure.

If you do not need to pay the storage and insurance and finance yourself because you are never taking delivery, it will cost you money to roll over the contract.

But effectively, as things get broadly more expensive over time, they may act as a hedge against inflation. The returns are driven by that long term price rise and a lot of peaks and troughs of speculation and supply/demand factors.

Speaking of troughs, to make a bad pun, if you buy a pork contract at the start of the year you may be able to sell it for more at the end of the year (although by now it's different pigs). But some years it would actually be cheaper at the end of the year. You would think that a leg of pork now probably costs more than it did in 1980. But maybe it became cheaper to make and the market is saturated, so one specific commodity might lag a long way behind your inflation basket.

Meanwhile you won't earn anything off it because you can't rent it out. Same as a block of gold really, except different supply and demand factors.

So, just as it is valid to hold gold in a portfolio instead of cash, as an inflation hedge or as something that might outperform equities in certain types of recessions, it could be valid to hold commodities. At times when interest rates are high and inflation is not, you would see less people holding gold and certain other commodities. Lots of things you could buy and hold as assets - from equities to bonds to real estate to a flagon of light sweet crude oil - will move in different directions at different times and so serve a purpose in a portfolio.

However, if the only way to make money out of them is 'luck of the draw' in terms of speculation, rather than an inherent yield of some sort, and it costs you money to roll contracts and it costs you money to employ an asset manager to run the fund, one would think it shouldn't be a major part of anyone's portfolio.

My commodities/ resources exposure is generally through equities or debt of companies who operate in the sector, even though I might have a spreadbet on some other more exotic assets from time to time.

Obviously buying commodities or resource companies is a different dynamic than buying the actual commodities themselves (e.g. highly variable costs of energy and personnel combined with other fixed operating costs of a gold miner can make a company incredibly geared to the price of gold or the price of one of the supplies). But long story short, I don't have any commodities futures trackers.

webnibbler

masonic wrote: »

Commodity futures trackers, for example CRBL, are advocated as a potential portfolio diversifier by Tim Hale.

I think Tim Hale has left commodity futures out of the portfolios in his most recent edition of 'Smarter Investing'. But I'm reading it at present so that may be in a upcoming chapter.

I hold CRBL for the diversification benefits, but have since read (and attempted to understand) the effects of contango and backwardation on futures. Based on a principal of not owning something I don't really understand I'm thinking of selling this part of my portfolio sometime soon.