Consider a Small Position in Commodity ETFs to Diversify a Portfolio | ETF Trends

Despite the underperformance in commodities, some financial advisors suggest holding commodity-related exchange traded fund exposure to help diversify an investment portfolio in case traditional assets experience greater volatility.

Some advisors argue that a small allocation to broad commodity exchange traded products, such as the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) or iPath Bloomberg Commodity Index Total Return ETN (NYSEArca: DJP), is important investments for a long-term portfolio strategy as the the asset class provides diversification and inflation-hedging benefits, and investors should not be dissuaded by short-term moves, reports Daisy Maxey for the Wall Street Journal.

“Historically, commodities have demonstrated attractive returns with long-term performance and volatility similar to equities,” Treven Ayers, chief investment officer at Clearview Wealth Management, told the WSJ, adding that commodity investments may offer low correlation to other asset classes, counter-cyclicality and improvements in risk-adjusted returns.

Moreover, after falling off over the past 18 months, Ayers believes that investors seeking commodities exposure can now find an attractive entry point.

Over the past year, DBC has plunged 38.3% and DJP plummeted 31.0%. Both DBC and DJP are now trading near the lower end of their relative strength index, which suggests that the two ETPs are hovering near oversold levels.

Nevertheless, investors should not go overboard with their commodity exposure. For instance, Ayer suggests a 2% to 4% allocation would suffice for most long-term investors with a balanced investment portfolio. The money manager also includes a position in the ELEMENTS Linked to the Rogers International Commodity Index – Total Return (NYSEArca: RJI), which includes a broad exposure to energy, metals and agricultural products.

Michael Yoshikami, chief executive of Destination Wealth Managemen, which also include a position in DJP, contends that a commodity ETN may also offer a better chance for diversified returns with diminished volatility than one would experience with pure equities. Yoshikami also advises a small 4% to 5% position in commodities.