How Do You Take Your Commodity Exposure?

/How Do You Take Your Commodity Exposure?

How Do You Take Your Commodity Exposure?

By | 2017-08-18T17:03:41+00:00 October 31st, 2013|Uncategorized|4 Comments
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(Last Updated On: August 18, 2017)

Commodities are an interesting asset class. A classic case of “Wall Street Trend following:” Sell products that have recently done extremely well.

Prior to the massive commodity runup  commodities were a speculator’s game–Why invest in commodities? Are commodities even an asset class?

cmdy

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Then in the early 2000’s commodities went on a raging bull market. All the sudden every endowment/pension on the planet needed exposure to the “ultimate uncorrelated alpha.”

That worked out well in 2008…D’oh! But the concept survived and commodities are still an integral allocation piece for most allocations.

Below I present some results for 3 key competitors in the space:

  • SPGSCI–Goldman Sachs Commodity Index. (original product)
  • DBC–DB PowerShares Commodity Index. (GSCI but with better “roll” control)
  • SDCITR–Summer Haven Dynamic Commodity Index. (the “academic” attempt)

Here’s the performance YTD. Looks like the vampire squid and the ivory tower are neck and neck.

commodities

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.


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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
  • Smruti

    Both SPGSCI and DBC have a systematic overweight to energy commodities. SDCITR is much more diversified. So comparing them is kind of unfair in the sense that it doesn’t tell you much about the relative strengths of the respective methodologies. This is especially true for shorter time horizons.

    But the point about products being pushed based on recent performance is right not the money. And it is not limited to commodities as well. Low volatility anyone?

  • Smruti,

    Your point related to different weighting schemes is 100% spot on. There is an element of apples to oranges comparison.

    “Wall Street trend following” is pervasive. It if has a pulse…SELL IT

  • Aaron

    Yeah, has anybody looked at the long term returns of commodities (like the past 200 years). Horrid! They are only good for tactical strategies where they spend most of their lives on your shelf, and you pull them out when needed. I would never buy and hold a commodity.

  • yep, they are a great way to buy inflation returns with insane volatility.