Valuations continue to remain a concern for advisors as inflation remains high and interest rate increases loom. An alternative investment strategy for advisors seeking diversification while potentially increasing the risk-adjusted returns of their clients’ portfolios is investing in commodities, according to a paper from WisdomTree.
The WisdomTree Enhanced Commodity Strategy Fund (GCC) invests in a basket of commodities and bitcoin futures in seeking diversification in assets that are uncorrelated to most equities and fixed income returns. It seeks to select maturities dynamically so as to increase the carry, or yield that is expected over the investment period of a commodity if the market remains the same. It’s an approach that offers the potential for reduced volatility compared to front-end future investing products, while seeking to increase returns.
Commodities are an attractive play in inflationary environments because their prices typically rise with inflation, and they are considered “hard assets” with defined, intrinsic value. With most traditional 60/40 portfolios being very susceptible to risk, commodities can be a good hedge, particularly when the real interest rate is negative, calculated after inflation.
GCC can be a good hedge for a portfolio because of its uncorrelated performance to the S&P 500 and the Agg, as seen in the table below.
Image source: WisdomTree
So Why Bitcoin Futures?
Bitcoin is in the early stages of adoption, a fact most easily seen in its continued and pronounced volatility, and its price could be somewhat driven by speculation. Bitcoin has many similarities to gold, however, and in the long term WisdomTree believes that it can serve as a store-of-value vehicle in inflationary times.
“The current inflationary environment so far aids its store-of-value narrative, as fiat currency and bonds become less attractive. Gold, traditionally a good inflation hedge, has been disappointing over the last 12 months and many attribute bitcoin to taking in some of the demand, as can be seen with our own allocation shift,” wrote the authors of the paper.
Bitcoin has a fixed supply of 21 million coins, with a supply that is reduced every four years by the halving of the block reward for miners. Bitcoin remains highly uncorrelated to equities and fixed income, and bitcoin futures can offer enhanced portfolio diversification opportunities.
Image source: WisdomTree
Bitcoin futures allow for exposure to bitcoin, although the prices of bitcoin futures along with their costs should be expected to differ from spot bitcoin price. The bitcoin futures market debuted in 2017 and has seen remarkable growth and maturation since, particularly with the launch of bitcoin futures-centric ETFs last year.
GCC is an actively managed ETF that offers broad exposure to the following commodities sectors: agriculture, energy, industrial metals, and precious metals mainly via futures contracts. It also can invest up to 5% of its net assets into bitcoin futures contracts, but does not invest directly in bitcoin.
Current weighting of GCC is 30.02% to energy, 22.55% to industrial metals, 18.82% to grains (agriculture), 15.05% to precious metals, 7.62% to softs (agriculture) such as cotton and sugar, 4.40% to livestock (agriculture), and 1.53% to bitcoin futures.
GCC carries an expense ratio of 0.55%.
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