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.
“We’re underweight because of the obvious systemic headwinds commodities face right now,” Yoshikami said, “but we are making a tactical bet that commodities in lesser amounts will be good for the portfolio long-term.”
Kevin Hrdlicka, manager of investment services at Savant Capital Management, who holds a position in DBC, also suggests a 3% to 5% allocation to commodities to reap the potential benefits after the recent pullback.
“The unpredictable nature of when commodities will outperform is exactly why it makes sense to have a small dedicated allocation,” Hrdlicka added.
PowerShares DB Commodity Index Tracking Fund
For more information on the commodities market, visit our commodity ETFs category.
Max Chen contributed to this article.