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Commodity Futures Funds

 

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Commodity Futures are attractive as diversifiers: they tend to have stock-like returns, but tend to be relatively uncorrelated with other asset classes.  In fact, Commodity Futures is the best diversifier known to us.  For more information about Commodity Futures, see here.

There are several very similar investment options available.  Which is best?

The funds are listed in rough order of our overall preference.

Preferences are listed separately for use in retirement accounts and for taxable accounts.

For a listing of our preferences in other asset classes, see here.

Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)

bulletDFA Commodity Strategy Portfolio (DCMSX).  E/R: 0.33%.  Basically, this fund invests in futures and futures derivatives designed to track the Dow Jones - UBS Commodities Index Excess Return.  It invests enough in these futures to simulate full investment in Commodities.  A smaller portion of the portfolio is set aside as collateral.  The remaining cash is invested in short-term investment grade bonds.  Actually, tracking the index closely isn't a goal of the fund.  The fund tries to add value by NOT slavishly tracking the index.  For example, it tries to roll its futures on days other than those specified by the index.  Further, it uses a "variable maturity" strategy on its futures exposure, aiming to target futures maturities which suggest higher future returns.

bulletPowerShares DB Commodity Index Tracking Fund (DBC).  E/R: 0.83%.  This Exchange-Traded fund invests in commodities futures in its attempt to track the Deutsche Bank Liquid Commodity Index Optimum Yield Diversified Excess Return, a custom commodity index created by Deutsche Bank.  It invests the collateral in short-term bonds.  For more information on ETFs, see here.
 
bulletPIMCO CommodityRealReturn Strategy Fund Institutional Shares (PCRIX).  E/R: 0.74%.  Basically, this fund invests in futures derivatives designed to track the Dow Jones - UBS Commodities Index Excess Return.  It invests enough in these futures to simulate full investment in Commodities.  A smaller portion of the portfolio is set aside as collateral.  The remaining cash is invested in TIPS.  This fund charges a 2% redemption fee, payable to the fund, if you sell within 30 days of purchasing.  This is intended to be a disincentive to use the fund for short-term trading.  Our preference for PCRIX over DBC is not a strong one.

bulletUnited States Commodity Index Fund (USCI).  E/R: 0.95%.  Basically, this ETF invests in commodities futures in its attempt to track the Summerhaven Dynamic Commodity Index - Excess Return Index, a custom commodity index created by Summerhaven Indexing.  It invest the collateral in short-term treasuries.  The index this fund tracks tries to shift to commodities which exhibit traits of having low inventories, which, they believe, suggests good future returns on those futures.  For more information on ETFs, see here.

bulletiShares S&P GSCI Commodity-Indexed Trust (GSG).  E/R: 0.75%.  Basically, this ETF is designed to track the Goldman Sachs Commodity Index - Total Return Index.  It invests enough in CERFs (i.e., futures designed to track the GSCI - Excess Return Index) to simulate full investment in Commodities.  A smaller portion of the portfolio is set aside as collateral.  The remaining cash is presumedly invested in short-term bonds.  We like this fund both because it indexes the commodities portion of its investments and because it has a very low expense ratio.  We don't like that it tracks the GSCI instead of the DJ-UBSCI (the GSCI is HEAVILY weighted in energy -- basically, the GSCI is largely a play on energy futures -- the DJ-UBSCI is much more broadly diversified across various commodity classes).  For more information on ETFs, see here.

bulletHarbor Commodity Real Return Strategy Fund Institutional Shares (HACMX).  E/R: 0.94%.  This fund is designed like PCRIX above, only it is newer and more expensive.  We see no reason to buy it, given the above less costly alternatives.  Interestingly, this fund is also managed by PIMCO.
 
bulletGreenhaven Continuous Commodity Index Fund (GCC).  E/R: 0.85%.  This ETF is designed to track the Reuters Continuous Commodity Index Total Return (CCI-TR).  This index equal-weights each of 17 commodities.  The fund invests in futures and treasuries as necessary to emulate the target index.  This fund is relatively new (started in January 2008) and the fund company is relatively new.  We are concerned that the expenses for this fund may end up being quite high, as the fund company doesn't plan on absorbing any expenses.  For more information on ETFs, see here.

bulletCredit Suisse Commodity Return Strategy Fund Institutional (CRSOX).  E/R: 0.79%.  Minimum initial investment: $250,000.  This fund follows a similar strategy as PCRIX above, investing in futures derivatives designed to track the DJ-UBSCI, but it invests the collateral in short-term Treasury bonds instead of TIPS.
 
bulletUBS E-TRACS Dow Jones-UBS Commodity Index Total Return ETN (DJCI).  E/R: 0.50%.  This is an Exchange Traded Note (ETN).  An ETN is similar to an ETF (for more information on ETFs, see here) in that it attempts to track an index and is traded on an exchange.  HOWEVER, it is a bond which is backed only by the full faith and credit of the issuer, which in this case is UBS AG.  As such, we judge that it has unacceptable credit risk, regardless of the financial soundness of the issuer (i.e., the credit risk, however small, is unacceptably high given that it is totally undiversified).
 
bulletUBS E-TRACS Constant Maturity Commodity Index Total Return ETN (UCI).  E/R: 0.65%.  This is an Exchange Traded Note (ETN).  An ETN is similar to an ETF (for more information on ETFs, see here) in that it attempts to track an index and is traded on an exchange.  HOWEVER, it is a bond which is backed only by the full faith and credit of the issuer, which in this case is UBS AG.  As such, we judge that it has unacceptable credit risk, regardless of the financial soundness of the issuer (i.e., the credit risk, however small, is unacceptably high given that it is totally undiversified).
 
bulletiPath Dow Jones-UBS Commodity Index Total Return ETN (DJP).  E/R: 0.75%.  This is an Exchange Traded Note (ETN).  An ETN is similar to an ETF (for more information on ETFs, see here) in that it attempts to track an index and is traded on an exchange.  HOWEVER, it is a bond which is backed only by the full faith and credit of the issuer, which in this case is Barclay's Bank PLC.  As such, we judge that it has unacceptable credit risk, regardless of the financial soundness of the issuer (i.e., the credit risk, however small, is unacceptably high given that it is totally undiversified).
 
bulletiPath GSCI Total Return Index ETN (GSP).  E/R: 0.75%.  This is an Exchange Traded Note (ETN).  An ETN is similar to an ETF (for more information on ETFs, see here) in that it attempts to track an index and is traded on an exchange.  HOWEVER, it is a bond which is backed only by the full faith and credit of the issuer, which in this case is Barclay's Bank PLC.  As such, we judge that it has unacceptable credit risk, regardless of the financial soundness of the issuer (i.e., the credit risk, however small, is unacceptably high given that it is totally undiversified).
 
bulletELEMENTS Rogers International Commodity Total Return Index ETN (RJI).  E/R: 0.75%.  This is an Exchange Traded Note (ETN).  An ETN is similar to an ETF (for more information on ETFs, see here) in that it attempts to track an index and is traded on an exchange.  HOWEVER, it is a bond which is backed only by the full faith and credit of the issuer, which in this case is Swedish Export Credit Corporation.  As such, we judge that it has unacceptable credit risk, regardless of the financial soundness of the issuer (i.e., the credit risk, however small, is unacceptably high given that it is totally undiversified).

Taxable Accounts

You generally should not hold commodities futures in a taxable account.  The asset class is very tax-inefficient.  However, if you did, our preference would be nearly the same as for a retirement account.  The only difference would be slightly more preference for DBC, because of its expected perfect capital gains tax efficiency as an ETF (and because the gains from its futures contracts are treated as being 60% long-term capital gains).

Some suggest that one of the ETNs might make a good choice in a taxable account.  Even if it weren't for their unacceptably high credit risk, we judge that there is significant question regards their tax efficiency.  It MAY be the case that they are spectacularly tax-efficient (they don't make any payouts until maturity, so if you hold it for at least one year, 100% of any profits you make are taxed at the preferentially low long-term gains tax rate).  HOWEVER, while the IRS hasn't ruled specifically on this issue, it has ruled on taxation of one particular type of ETN -- currency ETNs.  And the IRS ruling was that currency ETNs did not get the favorable tax treatment that ETN issuers brag about for ETNs in general.  We wouldn't be surprised if the taxation of other ETNs follows the precedent that the IRS set for currency ETNs.

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This web page contains the current opinions of Eric E. Haas at the time it is written and such opinions are subject to change without notice.  This web page is intended to serve two purposes:

bulletTo educate the public; and
bulletTo provide disclosure of Mr. Haas' opinions to prospective clients.  We believe that prospective clients are well-served by being made aware of what they are buying and what they are buying is advice that is based on these opinions.

We believe the information provided here to be useful and accurate at the time it is written.  Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

No investor should invest solely on the basis of information listed here.  Before investing, it is important to consult each prospective investment's prospectus and consider both its risk/return characteristics and its effect on your overall portfolio.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice.  Where specific advice is necessary or appropriate, Altruist recommends consultation with a qualified tax adviser, CPA, financial planner, or investment adviser.  If you would like to discuss the rationale or support for any particular idea expressed on this web page, feel free to contact us.

 

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